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Should I Buy a Turn-Key Rental Property or a Fixer-Upper

by Editor | ezLandlordForms

You’re in the market for a rental property and you’ve narrowed the options to several possibilities when you confront an investor’s dilemma: Should you make an offer on the tidy unit that’s in perfect shape and ready to rent? Or, should you go for the one that’s priced for far less, but will need some serious TLC before it can be leased at a rent that meets your target income?

If you’re handy around the house and you have free time, the fixer-upper could be worth serious consideration. And if you possess remodeling skills and solid connections with contractors who can do the specialty work that you can’t, then a property that needs TLC really might be the best bet.

However, there are still questions to consider before signing the papers. For instance, how close will you be, geographically, to this home-that-needs-love? Will you be able to get a loan, and can your budget accommodate the thousands that you’ll need to spend to make improvements? Are those contractor friends going to be available when you need them?

This is a great time to brush up on your Microsoft Excel skills or start a good, old-fashioned paper spreadsheet because there will be pros and cons with either option.

Consider factors – do your research

Important factors to weigh include the properties’ distance from your home base, the rental market where the units are located, and financing costs for both options.

A turn-key property that is already housing a tenant is likely to need less oversight than one that must be upgraded and will probably be vacant while it’s worked on. You may not mind an hour or two drive if you only have to perform monthly inspections and screen new tenants once a year or so. On the other hand, if you expect to spend many hours each week remodeling and making repairs, an hour’s drive could eat into the time you need for other enterprises – like working a full-time job.

Of course, no matter how modern your unit, no matter how perfect your tenants, there will still be new demands on your time. Unless you intend to have a property management company handle your rental, plan on getting nighttime calls, having your vacation interrupted, and overseeing unexpected repairs. That’s just part of the job of a landlord and you should be close enough to your unit to get there in a hurry in an emergency.

There’s nothing wrong with buying outside your immediate area, but you should be as familiar with the community that hosts your rental as you are with your own, according to Dennis Cisterna, Investability’s chief revenue officer.

“Market research has never been easier, so there are no excuses. Talk to local brokers, read the online version of the local newspaper to understand what is happening in the economy, and even visit the area if you’re serious. Identify the drivers behind the current housing market and know the historical context,” Cisterna says.

Also, take into account the demand for housing in the area you’re considering investing in. If that fixer-upper is in a good neighborhood, you’ll have a waiting list of tenant applicants when you’re ready to lease. If it’s surrounded by dumps, however, the expected rental income may not warrant the major upgrades you envision.

The big lure of a fixer-upper is greater profit but Cisterna urges investors to resist the temptation to jump at a bargain, especially one on a long-distance property. “The rule of an opportunity being ‘too good to be true’ is particularly applicable in long-distance real estate investment purchases,” he says.

Financing options will dictate, to a great extent, which property you can afford. Banks are apt to set more stringent terms the riskier the investment and will want to see data that backs up predicted rental income, a more difficult task with a property that has generated little or no rent in recent years. Remember, too, that your aim is good, steady monthly income – not long-term value appreciation since you can’t count on the future real estate market. In other words, don’t buy that needy property with the sole focus of increasing its sales value.

A turn-key property may appear to be the more practical investment for someone seeking immediate income, although you should take time to research all the secondary costs you’ll encounter. For instance, what is the tax rate in the area? Is the property in a homeowner’s association that is liable to hike annual fees? Are there higher-than-usual insurance risks at the property due to a dry climate, earthquake, or flooding history?

In the end, listen to your gut

The decision between buying a turn-key rental or a fixer-upper property is a very personal one and only you know what your comfort zone is. There are financial advantages to both, and each opportunity presents income potential so there is no “right” choice.

Once you’re armed with all the facts, pause and consider what you really want out of this investment. Maybe you’re a talented carpenter but you’d rather work on your own projects for personal enjoyment than labor over repairs in an investment property. Maybe you’re all thumbs, yet part of your investment dream is to become better at remodeling, in which case you will need to have reliable contractors who can guide you as you learn.

Finally, if you hate surprises, a fixer-upper probably isn’t for you. Like every property, rental units develop unforeseen problems – there just are usually more with the fixer-upper. But, if watching the movie “Money Pit” made you itch for a chance to grab your tool belt and don a hard hat, that might be a sign that a turn-key property would fall short of your investment dream.

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larry block
larry block
4 years ago

Thats great advice, All landlords/housing providers should know their limatations in not only what they can & cant do, but also the amount of time & money to be spent or saved

1 year ago

I would add some important things to this. We bought a fixer upper and had contractors do the work on it. it is now the nicest house on the block by a long shot. Things I wish i had done beforehand:

  1. Select TWO contractors who can do the work, to do the inspection. While we did our due diligence and got a very good inspection report which told us what we were up against, there were building considerations we had not considered which ended up costing more money in the end to fix because a builder wasn’t involved in really looking at it from that perspective. Inspectors have their checklists but in the end most of them arent looking at the project in terms of what additional steps might be needed to refurbish, just problems they see. If you’re not a contractor yourself, you may not understand the import of those observations, but active builders will probably see it as they will be forced to add it to estimates. Had we been able to foresee those things ,we may have gone a different way.
  2. DEFINITELY do this before you officially apply for the loan. The reason is because banks don’t JUST lock the rate, they lock it as regards that particular PROPERTY. What I am saying is that in an escalating rate environment, this is really important to know; because once we realized we might want to choose a different house after all, we went to the bank and gave them a different address, but they told us that if we changed houses we would have to relock the rate…at a now higher interest. In fact it would have meant about $22,000 over the course of the loan (plus the loan costs we had already paid for in the form of an inspection etc…), which we then had to consider “sunk cost” towards the original one we ended up buying. So remember that you really need to know the house and what its cost of refurbishment will be before you get that loan locked in.
  3. If you’re doing the siding anyways, do the insulation. It’s actually one of the more reasonable things you can do for the house and add value. The electric bills of uninsulated or badly insulated houses cn be huge. DURING construction, the electric bill hit $400 because the heat was exchanging so quickly and even slightly before the n the exchange through walls that arent insulated is fairly quick in extreme temperatures. If you’re doing siding anyways, have them suck out the old and put in the new. The A’C after we did it behaved enormously differently which not just reduced our costs in the short and long run, but it probably saved a ton of wear and tear on the A/C and we only spent $3K doing it in our house. Over time that’s really inconsequential to us.
  4. Set deadlines. We wish we had. We signed a “pay as you go” contract that said we would pay certain amounts as certain stages were done, but we weren’t careful about WHICH parts. My wife was gone over 2.5 months overseeing this project, which was pretty absurd amounts of time and we paid a lions share of the project near the beginning of it, which we shouldn’t have done in retrospect. Get good advise on where the BIGGER parts of the project are and ask the contract be modified so that appropriate parts are when you pay as you go. They don’t lose their motivation to get the rest done quickly that way. Our project was a bit involved and so we expected snags; but two weeks became 2.5 months. Your contract with the builder is very important! structure it to make sure they have lots of inducement to make your project their priority.
  5. Subcontractors are not your contractor. Be careful who you blame. You want the general contractor on your side and getting mad at them for things their subcontractors did is the wrong tact. A good relationship with the general contractor is pivotal to the project getting done and we got a LOT of mileage out of remembering that. Despite the setbacks we had, it was our good relations with the General contractor that ended up getting us a lot more than we originally asked for in the contract and I was very pleased with how he handled what came his way. Most problems were really not his doing but he was happy to try and push the rock for us when it came to it. Value that.
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