Depending on your goals and comfort level with the current housing market, buying a home that is marketed as a fixer upper will afford you several potentially profitable options. You can hold onto your purchase for a while and try to resell it for a higher price in a good resell environment, or you can “flip” the house, which means very quickly after your purchase you sell it again either after first fixing it up yourself or paying others fix it up for you. Then again, you have a third option of indefinitely renting out the house after you have completed the renovation work. Using your newly remodeled home as a rental can become an excellent investment and a great way to realize profits each month while the house builds equity.
Even if the home itself doesn’t appreciate well due to market changes, the money you make each month will most likely be greater than what you pay for its mortgage. This is especially true if you are able to make use of other people’s money as a form of investment, such as an interested bank or investment group. This is called “leverage,” and leverage can serve as an important form of capitalization when starting a business of buying and fixing up homes for rental profit.
By tapping into a lender for a home loan or special financing, you will be paying them a certain fixed amount each month just as you would on a typical home loan. However, if you remodel the home and then rent it out afterward, you will likely earn more each month than what you are paying for the loan itself. Consequently, you can pocket the extra funds earned from the monthly rent and turn your investment into a profit, even if a modest one. Later, you may also have the opportunity to refinance your loan at a lower interest rate, enabling you to invest in additional properties or other less expensive alternatives. If you are successful at both remodeling a home effectively and renting it out quickly, you stand to earn a meaningful profit.
The primary disadvantage to this approach occurs if you buy too many homes at one time without ensuring you have secured long term tenants. If one or more of your rental units is not occupied for any significant period of time, you may run into the financial problem of owing too much to lenders while bringing in too little to cover the costs. However, as long as your rental units are fully occupied with qualified and dependable tenants, you can continue making a profit while you identify additional homes you can purchase, renovate and rent.
As a side note, to ensure your profits are high, you absolutely must choose a great location for the purchase of your fixer upper home in the first place. Search in a neighborhood that is up and coming, as well as generally regarded as safe. This will keep your rental prices high and comparable to others in and near the neighborhood. You will also attract more qualified tenants who should be capable of reliably paying the rent each month.