Purchasing a home for yourself can be overwhelming, so how do you go about buying an investment property? We’ve created a guide on how to start building wealth through real estate. This series will feature a list of the four most attainable ways to get started as a new investor, the advantages and challenges of each, financial aspects, what our local market looks like, and how to set yourself up for financial success.
Buying a fixer upper can be your first investment home
We’ve since covered the benefits of purchasing a duplex and renting out your first home. Buying a fixer upper as your first investment property is another path to building wealth through real estate. This course of action can seem a bit tedious to some investors because of the work and background research necessary, but it is also one of the most cost-effective ways to start your portfolio.
We’re here to lay out the advantages and challenges of buying a fixer upper, frequently asked questions about the process, and what the Des Moines metro has to offer for fixer uppers.
But first, is flipping a house before renting it out right for you?
What buying a fixer upper will cost you
There’s no need to sugar coat it: Fixing up an older house can be a considerable amount of work. What you save in money by doing yourself, you are spending in valuable time. However, it has plenty of benefits. It can be gratifying to look back and see the progress you’ve made. You will accumulate knowledge about the real estate world because you’ve put in the work yourself.
Investing in real estate is so great because it’s a tangible asset. You can change, fix, or add to your property in order to grow your money. However, a fixer upper may require a bit more TLC before hitting the rental market.
If you are looking for a rent-ready investment home, chances are you will be competing with home buyers and other investors. A lot of seasoned investors and homebuyers don’t want to purchase a home that will require a lot of their attention. This can make finding a fixer upper deal a lot easier, even when the market is crowded with buyers.
Buying a fixer upper gives you the opportunity to learn more about the real estate industry. “Carrying costs, insurance, you’re going to learn so much by doing it yourself,” Ben Flurey, the General Manager at RPM Iowa has gone through this process before. “When you buy a house to flip, you’ll want to be sure you can make at least 10% ROI (return on investment).”
Saving money is the biggest advantage. If you have the skills to flip a house, or have resources of people who can help you, you will save money. Updating your curb appeal is one of the easiest ways to improve your property. You can upgrade the front door, install outdoor lighting, and add a garden. Better Homes & Gardens has some simple, do-it-yourself ideas that you can find here.
You can buy ten properties through residential loans before you’re required to get a commercial loan. If you live there, you can have the opportunity to put 3-5% down. Furthermore, if you live there for two years, you can avoid paying capital gains taxes. You will be required to put 20% down if you do not live in the home. Weigh your options and decide what is the best move for you.
Buying a fixer upper requires a lot of sweat equity. Condos are more cosmetic work while single-family homes are cosmetic and structural. Make sure to do plenty of research on the back end before purchasing a home. Older homes tend to have unique structures, which could cause you problems when you go to make updates.
Ask about the condition of the roof, windows and their shape, if the house has good bones and is built on a sturdy foundation, and ask if electrical upgrades are needed. Really look into the property, more than you would a rent-ready, newer home, and estimate how much time you will end up spending.
What kind of vendors might I need and how do I find reputable ones?
Depending on what needs to be done to the house before leasing it out, you may need the following:
- General contractor
Ask specific industry questions. Do research beforehand so you can have a list of questions ready to go. Make sure each contractor is properly insured.
Arrange onsite estimations so they can give you a more narrow price range for your budgeting purposes. If you aren?t sure where to start, ask around and see who in your network has had success with certain contractors. You can also look to a local property management company for their resources.
Should I live in the home while I’m going through updates?
This is completely up to you. You may find that it is easier to get things done if you are living in the home. However, you may also find that living in the home gives you a lack of motivation to finish quickly or on time. Vacancy in the home may be a good mental reminder that you aren’t making any money on your investment property without tenants paying rent.
How long does it take to get my house rent-ready?
It can take a couple of weeks to six months, depending on how much time you can spend working on it in a week. “At max, you’ll want to spend four months if there are bigger repairs necessary,” Flurey says. Scheduling a plan of action and setting milestones for yourself is a great way to stay on track. Make a list on your calendar of when you would like to accomplish things. Give yourself a reasonable time frame.
If you have to hire out contractors, be sure to check in on them. Remember that they have several other projects other than your house. Be sure that your timeframe is reasonable and doable, and maintain communication throughout the process. You may be able to help with certain tasks to meet your deadlines.
Can I finance the repairs?
Yes, it is possible to finance the repairs. “A bank could give you the amount you need and wrap it into your mortgage,” Flurey says. “They lend the money to you temporarily after they do a preliminary appraisal of the house. Then they will do another appraisal to make sure that it is worth the money you put into it.” Flurey says these types of loans are not easy to get. But they are possible!
Buying a fixer upper in the Des Moines metro area
Through searching online platforms accessible to the general public like Zillow and Realtor.com, this is what the current market has to offer:
Price: $85,000 – $150,000
SF: 1,200 – 1,600 SF
Year built: 1900 – 1955
The opportunities to build wealth through real estate are seemingly endless. Buying a fixer upper is just another way to reach financial freedom. This is one of the most tangible ways, as you can develop and upgrade the home as much as you want to. As mentioned before, it’s one of the greatest ways to dive into the world of real estate. You’ll have access to so much knowledge that you can use moving forward as you grow your portfolio.