If you’re new to real estate investing, then this post probably isn’t for you. If, however, you have a lot of experience in the industry and want to make fabulous yields on your next property, then read on.
Many investment advisers will tell you to steer clear of fixer-upper properties. They’re a bottomless pit of expense, they say, and you’ll always struggle to rent them out or sell them on. It’s not worth the risk.
A lot of buyers, however, take their advice. Doing so means that the prices on these properties have to fall to clear the market. If prices don’t go down, then real estate remains up for sale for months on end, never shifting.
And here’s where the opportunities for investors lie. Because people don’t want to take the risk, savvy real estate investors who know what they’re doing can make a killing.
In this post, we’re going to take a look at the pros and cons of investing in a fixer-upper commercial property. While this class of real estate is a risk, that doesn’t mean that you should avoid it entirely, especially if you have a lot of experience in the industry.
The Pros of Buying a Fixer-Upper
Let’s take a look at some of the reasons why you might want to invest in a fixer-upper. What kind of rewards can you expect?
Most assets depreciate over time. Machines in factories and vehicles on the road go down in value as they wear out. Properties, however, don’t necessarily have to decay and fall into a state of disrepair. When you invest time and money in them, you can increase their value substantially, often to higher levels than before.
Of course, making sure that the value of a property goes up is no simple task. If you can do it, though, it is easy to make a healthy return and get money back on your investment.
So how does the process work?
Suppose, for instance, you buy a property for $200,000. Let’s say that you spend $40,000 doing it up and sorting it out. Naturally, you’d expect to sell it for $240,000, but you usually discover that you can pass it on for substantially more – perhaps even $400,000, for a gross profit of $160,000 – a substantial chunk of money.
Fixer-upper properties also have another advantage – there’s less competition. Unless you’re a professional investor, it is unlikely that you’re going to want to buy a dilapidated building – a factor that squeezes the market and forces down the price.
When there’s less competition for a particular property, it means that you’re far less likely to enter a bidding war. It is unlikely that there is another buyer out there who is willing to go toe-to-toe with you in terms of price. If it’s a fixer-upper, many are looking for bargains. They don’t want to go right down to the wire.
Fixer-uppers are incredible from a cashflow point of view.
Let’s say that you buy the property for $200,000 and then do it up so that it will sell on the open market for $400,000. That’s great. But even better is that you only took out a mortgage to purchase the original $200,000 property, meaning that your outgoings are far lower than any expected rental income.
Of course, whenever you buy a fixer-upper, you take some substantial risks. Fixer-uppers come with a whole host of problems you need to consider.
No matter how comprehensive your site survey before you buy, there’s still a risk that you’ll miss something. It is crucial, therefore, to plan your expenses and leave a safety margin that allows you to accommodate problems, as and when they arise.
You could wind up with huge issues and have to call out commercial roofers or foundation experts to come and fix the problem. There’s always a risk that the work will be substantial, and issues run deeper than you think.
More Difficulty Getting Finance
Mortgage lenders don’t much like the idea of lending out to people with fixer-uppers eighter. The reason for this is that the collateral value of the property is in doubt. If your new building isn’t fit for residential or business purposes, then they are far less able to sell it on and make back their money if you default on payments.
Some lenders actually penalize real estate investors who want to plow money into delipidated buildings by denying them special offers or discount rates. Often you have to pay the full cost of the mortgage from day one to cover the risks that the lender believes you pose.
You Don’t Always Know How Much Work The Property Needs
Most real estate investors plan ahead for work that they need to carry out on their properties. Sometimes, though, you don’t know what you need to do before you start working on the problems.
In most cases, unforeseen issues crop up, adding complexity and expense to renovations. You wind up having to make compromises or even botch some aspects of the process to keep costs down. When it comes to selling, these issues can put you at a substantial disadvantage.
So, do fixer-upper properties make the best real estate investments? The answer is a little complicated.
If you know what you’re doing and have a lot of experience investing in these kinds of assets, then you’re probably in an excellent position to make a high return. You know the lay of the land and have the experience you need to deal with issues as they come your way. Most people getting into real estate, though, don’t know what to look for and wind up making mistakes. They offer to purchase properties well above their market value.
The bottom line here is to only get into the fixer-upper market if you know what you’re letting yourself in for. The people best suited to this form of investment are those with experience renovating properties and bringing them up to scratch. They know which problems you can fix, and which are dealbreakers.