Is a Fixer-Upper House a Good Investment?

With housing inventory tight and fewer houses to choose from, some buyers are starting to consider homes that they previously would have dismissed as problems.

Buying a fixer-upper home can be a nightmare, punctuated by a series of unexpected disasters, or it can be a profitable venture. You can snag a rundown place in a good neighbourhood for way below the market price, invest some time and money renovating it, and end up with a like-new house that's worth a lot more than what you paid for it.  So before you take the plunge, make sure you have a realistic idea of what you're getting into.

Do the math

Figuring out what you should pay to buy a fixer-upper starts with a simple equation. First, add up the costs to renovate the property based on a thorough assessment of the condition of the house. Be tough with this estimate, which should include materials and labour — yours and other people's. Next, subtract that from the home's likely market value after renovation, drawn from comparable real estate prices in the neighbourhood. Then deduct at least another 5-10% for extras you decide to add, unforeseen problems and mishaps that have to be dealt with, and inflation. What's left should be your offer.

It's essential that the real estate contract include an inspection clause. At best, the inspection will assure you that the house is a good investment; at worst, it will help you back out of the deal. Often with fixer-uppers, it's something in between. The inspector will document a serious problem or two, and you can use the findings to get the seller to pay for repairs or negotiate the sale price downward.

If the house needs significant structural improvements, many real estate experts recommend avoiding it altogether. Major repairs like plumbing and electrical system overhauls, foundation upgrades, and extensive roof and wall work are usually "invisible" and hardly ever raise the value of the house enough to offset the cost of the renovation.

Pick projects that pay
The ideal fixer-uppers are those that require mostly cosmetic improvements — paint touch-ups, drywall repairs, floor refinishing — which generally cost much less than what they return in market value. New lighting fixtures, doors, window shutters, and siding, as well as updated kitchens and bathrooms, are also lucrative improvements.

The perfect fixer-upper is the home that everybody wants when fixed up but few can see past its imperfections to buy.

Be prepared to roll up your sleeves
Whatever renovation is required, it's usually most cost-effective when homeowners pitch in. A fixer-upper is for people who are willing to be do-it-yourselfers because it can save them a lot of money and they can keep the increase in home value for themselves.

If you're not the hands-on type, be prepared to devote a considerable amount of time — months or even years — to closely supervising contractors. But remember that all of your financial gains could be wiped out if the project goes over budget because of mistakes or unnecessary delays.

Line up the money
One of the most challenging aspects of purchasing a fixer-upper is paying for the renovation. Understandably, most people don't have much extra cash after making the down payment and paying closing costs, so coming up with the additional money to cover repairs or remodeling can be difficult.

If you have money set aside for repairs or you plan on taking out a loan, make sure you get an accurate estimate and then add another 20% on top of that. If you’re doing everything with borrowed money with no margin for error, there will be extra expenses no matter how carefully you plan.

Enlist help 
Make sure you have a network of helpers and never do the work by yourself. If you’re fortunate to have handy family members or friends, definitely enlist their help. Make sure to enlist the help of people you trust and know their level of experience and expertise in what you’re asking them to do.

Lastly, prioritize your projects and don't tackle them all at once, especially if you're doing it yourself. You don't want to start working on both the bathroom and kitchen and wind up getting stuck or out of money halfway through when your counters are all ripped out.

Buying a house is a stressful experience. Throwing a renovation on top of that, especially for a lot of first-time buyers, isn’t always ideal. Many people move into houses soon after they’ve entered a long-term relationship, and it can be tough on a relationship if you’re trying to figure out these difficult things that have big implications for your finances and how you want to spend your life.

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