Beginner real estate investors and veterans alike struggle with whether to buy a fixer-upper or instead purchase a move-in ready home. There is no right or wrong answer. Also true is that one’s situation and property availability change constantly, so today’s answer may not fit your needs in six months. Mashvisor can help you locate either type of unit, but which matches your needs today?
Which Is Better – For You?
As an investor who has purchased both fixer-upper rental property units and move-in ready units, my first advice is not to settle. If you really feel that a move-in ready unit is your best option right now, don’t be tempted to take on a project you are not prepared to handle. It’s always tempting to torture the data until it tells us what we want to hear. If your real estate investment strategy favors a move-in ready rental property acquisition, set your sights on a rent-ready unit.
Be Honest About What a Fixer-Upper Means
Before we dive too deeply into the decision on whether to buy a fixer-upper or move-in ready rental unit, let’s also examine what “fixer-upper” really means. In my experience in the Boston area, there are certain types of repairs that are predictable and cost-effective (fixer-uppers) and some that are almost impossible (basket-cases). And the difficulty is not related to complexity.
Related: How to Find a Fixer-Upper House for Sale
Here are some things that are easy fixer-upper projects. By easy, I mean you can find a contractor who will do the job for you start to finish without any hassles:
- Carpet replacement
- HVAC repairs or upgrades
- Painting interior and exterior
- Basic landscaping and tree work
- Roofing
Carpet is the single best example of a true fixer-upper project. You can have carpet installers come to you. They bring samples, they measure, they quote you and off you go. Most will even move and replace furniture and they carry away their own trash. Carpet is popular because of this easy culture carpet installers have developed.
Here are some projects that are difficult to hire workers to complete:
- Window treatments
- Bathroom remodel
- Kitchen remodel
Window treatments are a hassle because you need to be involved in selecting and sourcing the product, or you pay a hefty premium otherwise. My advice to any rental property investor looking to save money is to become an expert on window treatments yourself. Bath and kitchen remodels are great projects in terms of pay-back from added equity and are often worth the time and energy.
Bear in mind, buying fixer-upper homes instead of move-in ready homes can mean a longer path to positive cash flow. The reasons are that fixer-uppers always have hidden code violations in need of correction, and may stress your budget unless you are an expert in contracting. Fixer-upper homes will have a lower price, but take caution with your investment property financing. Be sure you leave enough money in your accounts to cover the needed work.
Related: The Pros and Cons of Investing in a Fixer-Upper
Last, there are properties I would walk away from unless you happen to be an expert on the needed repairs, or have a great contractor you already work with on such projects. They include:
- Septic issues
- Well issues
- Asbestos removal
- Lead paint abatement
- Improperly permitted living spaces or secondary structures
- Pools
From a rental property point of view, any unit in need of a septic system, with a troublesome well, or with a pool is not a viable unit. Any unit with an illegal living space is strictly off-limits. Your risk is just too high. If you are in the Airbnb vacation rental business, you will have no choice but to learn how to deal with these challenges, but for most real estate investors, these projects are just not worth your investment in time, money, and stress.
Related: 8 Signs a Fixer-Upper Investment Property Is Not a Safe Investment
The True Cost of Do-It-Yourself Contracting
Having remodeled and fixed up numerous investment properties, one observation I have is that just being the owner of a fixer-upper under construction is a part-time job. You need to either be the construction manager or be the general contractor’s informal partner on the project. That pulls you away from other work that makes you money.
If your thinking is, “I can paint, I can do the demo, and I can do the general repairs and landscaping,” be very certain you can do it profitably. What is your opportunity cost? In other words, what more profitable work could you be doing rather than painting a unit, or working in a yard landscaping? If this brings you pleasure and satisfaction, that is another matter. Calculate how much you make doing other work and compare that to the efficiency a professional can offer in terms of price and predictability of job completion. And last, what if you fall off of a ladder, or injure your back landscaping? Who will do your jobs while you recover? I injured my back landscaping in the 1990s. It was a daily problem for me for thirty years.
House Poor – Why Move-In Ready Can Work
For certain, a large percentage of available properties require repairs and correction of deferred maintenance. This work is also sometimes an equity-adder. However, I have found that the costs of adding a new unit usually deplete my accounts. The downpayment, closing costs, legal costs, and realtor costs around a new unit add up. This coupled with expenditures to do needed work before a tenant can be moved in can be a big drain. Be prepared.
By contrast, a true move-in ready home can quickly bring you welcome income immediately. The first month’s rent is paid in advance. You should create dedicated accounts for last month’s rent and any security deposit, so don’t count on those as available funds. However, within 32 days of signing a lease with a tenant, you will have two rent payments in hand. I have never turned around a fixer-upper unit in under two months. The last one I worked on took four, and it went mostly according to plan.
As you can see, we feel that a move-in ready home offers some big advantages. The downsides are a higher buy-in price and significantly lower inventory from which to choose. Remember, there is no such thing as a move-in ready short sale, pre-foreclosure, or foreclosure sale. All of those types of acquisitions will be fixer-uppers.
The fixer-upper model can work well if you have a good vendor list you already work with. Fixer-uppers are also in higher supply, and there can be some diamonds in the rough out there if you have a keen eye for which work is pricey and time-consuming and which type you can quickly deal with. Just be sure that your ROI model factors in your time and the value of that time.
In addition to helping you locate fixer-uppers and move-in ready rental properties, we have the tools you need to do financial modeling. Getting started with Mashvisor is easy. Check out our tools today.