Fixer Upper real estate can prove to be a very good business as long as you make the right decisions and put your money in the right places. One of the major decisions you will have to make when dealing with a fixer upper is what to do with the home once you have purchased the property itself.
You could either resell it at a higher price, flip it –meaning you resell the house immediately to other fixer uppers who would like a crack at fixing the house up and selling it on the market, or you could have it put on the market as a property for rent.
Here are a few things you should know regarding fixer upper homes so that you can make a better decision considering whether a property should be put up for rent instead.
The Advantages
The great thing about investing in rental houses is that well-placed homes can appreciate pretty quickly depending on the neighborhood. If you happed upon a fixer upper home in a suddenly progressive community, you could have very well hit the jackpot.
Looking at the bigger picture, experts predict that most properties appreciate in value by only about five percent per year. That doesn't sound very promising, does it? However, the amount you earn from a rental home isn't solely dependent on the appreciation in value of a property.
Even if you plunk down about $100,000 on a home, you could still make good income by the use of leverage. Leverage is the use of other people’s money, expertise, and time to purchase a home or make an income out of one.
This is made possible by the fact that you don't have to purchase a home right out of your savings. That would be a great risk to take – what if your venture tanks? Fortunately, not too many fixer uppers purchase property this way. Most fixer uppers use some sort of loan or financing to get their hands on potentially juicy property.
After using such to finance your purchase, you will of course, have to make regular payments to lenders plus interest. Now, what if you purchase a home like such, fix it up, and have it out for rent, and then use the rental money you get to cover loan payments and get an income as well?
That would be a great way to make good income out of the situation and is a great way to use leveraging.
It is also possible to refinance after a previous fix up so that you can move on to other properties. You should never rush the issue. Make sure you have ample time to make sure a property is ready for rental and can make an income before making the next move.
However, if you are confident in you skills as a fixer upper, having dealt with it in the past, then you may juggle a bit depending on your skill.
Having said that, the reason you should be careful not to commit to too many properties at the same time is the fact that some properties may earn a negative cash flow. This means that the property doesn't earn its keep, making leveraging impossible. You will end up paying the loans out of your own pocket.
This is a sure way to go broke fast – especially if you have multiple properties that are tanking at the same time. If you aren't able to plug this gap immediately, you could find your pockets hemorrhaging hard-earned cash!
Negative cash flow is caused when the rent doesn't cover the loan payment plus interest. It may be that the tenants don't pay on time, or the units are vacant, or the rent can't be made to justify a large loan payment.
To avoid the two later problems make sure you choose a good location in progressive areas. This will help assure you that you will have an ample supply of tenants. Also you will have to hone your landlord skills to the hilt to deal with those that skip paying up.
This skill involved keeping good records of transactions, tenant information and such. You will need this information to both deal fairly and legally with issues that arise out of the lease.
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