When we think about income property and hear the word fixer-upper, most of us think quick profit.
In theory, we consider every multifamily residential income property in disrepair as a grand opportunity to buy an investment property below market value, add a few cosmetic touches and necessary repairs, sell the property at a price substantially higher than the purchase price, and then reap the reward. In truth, however, this is not often the case.
For some, yes; there are many real estate investors who have made a fortune investing in real estate fixer-uppers. For countless others, however, investing in multifamily residential income property fixer-uppers has not been as kind–they made the investment only to discover that they have gotten over their heads. For them, unfortunately, the tendency is to sour on real estate investing before they come to realize that fixer-uppers are not necessary to make an excellent return on investment.
The trouble with this “flip-it-quick” mentality is that it tends to consider real estate as a kind of raw material that can purchased, turned into a product, and then resold. But it fails to recognize that the real wealth from real estate comes from four essential elements over the long haul. Namely, cash flow, equity growth from loan reduction, equity growth from appreciation, and tax benefits.
Multifamily residential income property fixer-uppers purchased to flip-it-quick also present two other issues to consider: the cost of anticipated repairs, and the cost of selling the investment property.
Unless you are a contractor or have the skill to reduce the cost of repairs and the time it takes to do them, you might purchase a building only to discover it is in worse shape than you imagined and end up spending every dollar and weekend fixing it up. Moreover, unless you are a licensed real estate broker and can reduce the cost of selling, you will undoubtedly pay around 6% of the selling price when you sell the property.
Here’s the bottom line. If you are considering a fixer-upper as an opportunity to make an extra profit, thoroughly evaluate whether it will be truly worth the extra risk and extra money. Also keep in mind that added capital investment decreases your leverage and thus, the fixer-upper would have to project a fairly good percentage rate of return to warrant the loss of leverage and increased risk.
