Rental Property Fixer-Uppers
By Steve Gillman
Most investors buy rental property as a long-term investment
based on cash flow, although for a while during the boom years
prior to 2007 they were also buying them as speculative plays.
Doing the latter burnt many investors, because they bought houses
that had negative cash flow hoping to cash in on the appreciation
within a year or two. But there is a way to safely buy based
on income while still looking for a bigger--and quicker--profit
The basic strategy here is to buy rental homes that are also
fixer uppers. Then, after some (hopefully) quick fixes, you rent
them out for better-than-average cash flow, with the option to
sell them at a profit if your work produced enough increase in
value. Let's look at how this makes rental property more profitable
in a couple ways.
To start with, you get to buy cheap when you look at fixer
uppers. Let's use an example to explain how this creates better
cash flow. Suppose you are looking at a house that would normally
sell for $100,000 if it was in decent shape, and would rent for
$900 per month. With proper financing, you might have cash flow
of $100 per month. But because this house has been trashed, you
are able to buy it for $70,000. Your work to fix it up costs
you $18,000. Now you have a home that might even get a bit more
than $900, because it has new paint, carpeting and appliances.
We'll guess that you can get $925 per month.
Notice that you are getting an extra $300 in annual cash flow
from the higher rent, but there is more than that. Because your
total cost is $88,000, rather than the $100,000 similar homes
are going for, your mortgage payment is about $75 less each month.
Add that savings to the higher rent and you are getting $200
total cash flow instead of the $100 that other landlords might
get for similar homes. You have doubled the cash-on-cash return
on your investment.
Now consider the other part of the equation, which is the
potential profit from selling the house. With a bit more rent
than others, along with new paint, carpet and appliances, the
home could already be worth more than $100,000. But in any case,
if prices are rising, you might be able to cash in for a decent
profit in a few years. If prices drop, you are largely protected,
since you only have $88,000 into the home anyhow, and you get
great cash flow from it as well. You can afford to sit on it
for decades if necessary to wait for real estate to start going
up again, and you'll be making money the whole time.
How Much Can You Make?
Do this right and you should make better positive cash flow
than investors in similar ready-to-live-in homes are making.
When the time comes to sell, you should also make thousands of
dollars in additional gains since you bought cheap to start with.
Ways to Make More | Related Opportunities
One way to cash in sooner and/or make even more cash flow,
is to rent the house on a lease/option contract. Using the example
above, you might give the renters the right to buy the home within
two years for $106,000, and charge $1,100 monthly rent, with
$250 of each month's rent going toward the down payment should
they choose to buy. If they don't buy you have thousands of dollars
in extra cash flow in those two years. You might repeat the process
with them or another renter/prospective buyer.
If they do buy the home, you won't need to pay a real estate
agent to sell, so you'll make a good profit--perhaps $12,000
after closing costs. That's in addition to the $9,000 in cash
flow you will have made during those two years. Then there are
the tax benefits you will have received.
Qualifications / Requirements
All you need is a willingness to deal with the unpredictability
of rental real estate, good credit, and some money to invest.
Look at rents and home prices in your area, to see if positive
cash flow is the norm or not. If it is, then you need to start
looking for the fixer upper opportunities that will allow better
cash flow and more profit potential.
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