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Top 3 Fixer Upper Mistakes

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If you are a regular reader of this blog, then you probably already know that one of my favorite investment property strategies – if not THE favorite – is buying a fixer upper, rehabbing it, refinancing, and holding it for several years.  I love this strategy because it allows me to buy cosmetically-challenged properties for dirt cheap, thereby enabling maximum ROI and cash flow.  However, even this strategy can cause problems if you make one of the following common errors.

The biggest mistake is a lack of money to get the job done.  This generally comes in two forms: either you can’t get financing or the repair expenses are much greater than you anticipated.  Both of these money-related issues are extremely common in the world of fixer uppers.

Regarding financing, banks will not usually give you a traditional mortgage on a fixer upper.  Generally, most banks will require the house to be livable for them to lend against it.  Additionally, banks always require appraised property values to justify the amount of the mortgage, and obviously a fixer upper will not appraise for its true, post-rehab worth.  Therefore, pursuing a fixer upper strategy typically requires access to private lenders, and if you do not have your ducks in a row on this prior to making an offer, the deal will probably wind up falling through before closing.

Underestimating the rehab costs is extremely easy to do for rookies.  If you do not have the experience to know what to look for, you’ll be hard-pressed to come up with accurate estimates.  Plus, many problems are hidden behind the walls, and if you are not savvy enough to account for these unknown expenses in your estimates, you’ll fall short.  Additionally, some people fail to account for the carrying costs (also known as holding costs) in their estimates.  You’ll have to pay for things like landlord insurance, property tax and utilities whether the property is rentable or not.  Obviously failing to factor these carrying costs into your estimates will result in a shortfall.

The second major mistake is underestimating the time required to execute the rehab project.  If your plan is to do much of the work yourself, be aware that many small tasks will take longer than you expected, especially if you do not have a lot of experience fixing things.  Even if you outsource all the work, you’ll still spend a ton of time getting estimates, coordinating the work, and generally managing the process.  The bottom line: if you do not have enough free time to have a part time job for 4-6 months, you will likely fail.  So honestly evaluate your time availability ahead of time.

The final mistake is spending more money than necessary on supplies and materials.  Ultimately tenants will be living there, and they inevitably beat up on houses.  Therefore, avoid the temptation to get stainless steel appliances, granite countertops, crown molding, etc.  Stick with basic, low cost materials because whether you pay $400 or $1000 for a new refrigerator, it’ll still get beaten up the same way.

To sum it up, the most common mistakes for fixer upper projects are a lack of money, lack of time, and overspending on materials.  So make sure you have your financing coordinated upfront, be conservative on your cost estimates, make sure you have enough time to work part time for 4-6 months, and focus on bare-bones materials and supplies.  Do these things, and you’ll be just fine!

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