The rapidly increasing real estate prices in many parts of the United States today continue to fuel interest in real estate investment. Many buyers view “fixer-upper” properties as particularly attractive propositions. By renovating rundown, dilapidated residential dwellings, aspiring real estate investors sometimes obtain significant financial returns.
Does this form of real estate investment always offer lucrative returns? Unfortunately, like many complex financial decisions, the best response to this question defies simple answers.
A Hot Real Estate Market Again
Two trends which contribute to interest in fixer-upper properties currently exist on the national real estate scene. First, interest rates remain attractively low. This fact means that more investors manage to qualify for loans to renovate rundown residential investment properties. Second, nationwide the prices of real estate have increased much faster than salaries. For instance, between 2012 and 2014, median wages rose by 1.3% yet median home price increases soared into the double digits, reaching 17%. Fewer Americans can afford to purchase a home today than three years ago.
In a few markets, home prices have zoomed to great heights compared with median income: Merced, California; Memphis, Tennessee; and Augusta, Georgia now boast sizzling residential property markets. A resurgence of interest in renovating fixer-upper properties typically emerges when real estate investors discover that buying and repairing bargain-priced homes sometimes yields high profits.
However, unfortunately, these trends do not always guarantee rosy results for investors attracted by the potentially lucrative returns. As an ROI increases, often risks increase substantially, too.
A fixer-upper home with sound systems that requires superficial repairs alone may indeed offer an excellent investment property. Additionally, some buyers reap substantial returns by purchasing bargain homes, living in them as they undertake repairs, and eventually reselling the property for a higher price. Purchasers with special skills, such as plumbers or electricians, sometimes reap huge returns investing in fixer uppers selectively.
Exercising a Cautious Approach
For instance, many investors discover that a “fixer-upper” advertised using loaded terms such as “must sell”, “needs TLC” or the ever-popular “Handyman Special” carries those descriptors for a very good reason. Renovating properties with damaged or missing home systems usually proves expensive.
A buyer may discover that numerous problems in a bargain property ultimately make repairing the home so costly that the investor benefits more by seeking only the underlying land or lot value upon resale. In a rising real estate market, that strategy may offer an attractive ROI. However, if prices fall again, a purchaser who invests in a rundown home may regret the initial buying decision.
Real estate investors need to exercise caution when purchasing properties for renovation and resale. For every success story in this field, cautionary tales exist, too.