Buying a Fixer Upper as your Primary Home for Investment Purposes
Buying a fixer upper as your primary home can be one of the wisest financial decisions you can make. However, it doesn’t come without risk or stress along the way.
Before I get into the risks, let’s talk about the two biggest upsides to going this route from an investment point of view.
Upside #1: You’ll gain the most equity from a fixer upper after the work is complete. Let’s say you buy a home for $1M, and it’s in need of serious work. The work will take about a year and cost about $100k. However, the property will be worth $1.4M afterwards. That means you just bought a house for $1.1M (including the work) and gained $300k in equity after just one year. That’s a great return! You will find that for homes already in good condition, there aren’t many improvements you can make to get a similar sized return.
Upside #2: If you are single and have lived in your primary residence for 2 of the last 5 years, your first $250k in gains is tax free. This upside is perhaps the greatest tax benefit to primary home ownership. If you are married, that number goes up to $500k. Let’s say you bought that $1M house and put $100k into it, and then sold it for $1.4M 2 years later. If you were married all $300k in gains would be in your pocket without a penny paid in taxes on the gain. Where else can you get that kind of return tax free? When you find out please let me know!
Now let’s talk about all the potential downsides involved.
Downside #1: Fixing up a home takes a lot of time. Most people don’t have unlimited time and bandwidth in their lives. They often have jobs, partners, kids, parents, grandparents, a social life and hobbies. You only have so many hours in a day and when you embark on a project like this, expect to dedicate a huge chunk of your bandwidth to this project.
So one of the first things a good real estate agent will do is help you identify properties where the returns seem relatively high but the bandwidth expended appears to be relatively low. A good agent will help you find the sweet spot where there is enough to do to capture a large sweat equity gain, but not SO MUCH to do that you lose your mind.
Downside #2: Fixing up a home takes knowledge. If you are one of those people who understands how to install electrical systems and gut renovate a bathroom or kitchen, good on you! But for the rest of us, where do we begin? And this is where things can get tricky. If you don’t have the knowledge or the network, you are going to have to go out in the world and find the best vendors for the job. And how do you evaluate? Do you ask for references? Do you ask for quotes? Do you just feel people out?
The answer is that it can be extremely tricky to figure out who will do reliably good work at a reasonable price, especially your first go around. And if you make even one wrong pick, it could cost you 5 figures and potentially months of delays (and holding costs).
So the next way a good real estate agent helps is they tend to have a solid network of GCs or at least sub contractors who have reliably done work for many of their clients in the past. A good agent has seen what those sub contractors can do for your particular job. Some contractors are best for high end projects while others are better for more medium or investment-grade projects. Matching the right contractor to the right job can help you stay within budget and ensure you are getting that equity you are looking for.
Last but not least, the property you choose can help determine whether you’ll win or lose right out of the gate. A great agent will help you understand what areas you should target and what you should look for in a property. How does the layout, the street, the lot, and the development in the area all interplay to create a win? A great real estate agent will point out the pluses and minuses so you understand both the risks and upsides when finding your ideal fixer upper.