If you watch enough television, you’ve probably seen a show about buying and flipping houses. They make the “fixing” aspect of a fixer-upper look easy – just buy the place, put in a little work and cut to the scene where you sell for over market value. Easy as cake, right?
While repairing a fixer-upper can be a rewarding experience – and a valuable investment opportunity – it can also lead to a litany of problems that leave you exhausted and financially in the hole. It’s a lot more work than TV shows let on, and even the most experienced DIY veteran can run into unforeseen problems that throw a wrench into the whole operation.
If you’re thinking about a fixer upper, read ahead for some pros, cons, and things to watch for.
What to Look for
People interested in rental properties often make one critical mistake when looking for a house: they try to find a home they’d like to live in. Instead of looking for a property that fits your own tastes, take a home that needs more TLC.
Mindy Jensen, community manager of Bigger Pockets, and her husband Carl have flipped eight houses together. They have a simple strategy: find an ugly home with no structural problems, buy it, live in it, fix it and flip it.
“I love 80’s style cabinets,” Jensen said. “I love shag carpet, black walls, gold fixtures and pink toilets. All of these things are easy to replace, but many people don’t want to take the time to do it.”
The Jensens look for eyesore properties – ugly houses in beautiful and safe neighborhoods. Those houses will sell quickly once they’ve been upgraded because they now fit in with the rest of the homes in the area.
Jensen said not to confuse “outdated” with “weird.” There’s a difference between a house that hasn’t been upgraded in a few decades and one that has a circular bedroom.
“A weird, dome-shaped house will sell eventually, but your potential buyers are much, much fewer,” she said.
Jensen and her family live in whichever house they’re currently remodeling. Because they stay there for two years or more, they don’t have to pay capital gains taxes on any profits less than $500,000. It’s also easier for them to only pay one mortgage instead of two.
The downside of living in your fixer-upper is that you have to be living in a home that’s constantly being worked on. If that’s not your cup of tea, you may want to take your investment money elsewhere.
How to Make It Worthwhile
The idea of earning tens of thousands of dollars obviously sounds appealing, but it’s also possible to flip a home and lose money in the end. New homeowners often find more problems than they realized, underestimating remodeling costs and overvaluing their own DIY experience.
Take the time to do the math on the house to ensure that your flip doesn’t become a flop. What improvements does it need? How much will those cost? What will be your total taxes, fees, and other expenses?
After you’ve created a budget of what the home needs, add a 5-10% buffer. It’s not unusual at all to spend more than you originally thought. If you’re prepared for that, you won’t have to dig around in your savings account or take out a loan to pay for necessary upgrades.
Once the flip is done, Jensen recommends that people list their home for less than market value.
“If your plan is to sell quickly, pocket some nice, tax-free profits and do it all over again, the faster you can sell your house, the faster you can buy another one and start over,” she said.