Fixer-upper investing is a two-way street, bearing high risk and high reward for your endeavor. On one hand, you have the potential to purchase properties at a reduced rate, work on them a little, and then resell them for a large profit, on the other you must pay money upfront in the hopes of recouping your expenses at the end of the contract.
Yet, you may still have to contend with the possibility of unanticipated repairs and market volatility, as well as cost differences between when you buy and when you execute your exit strategy.
Cutting back on the fixing
When looking at fixer-uppers, seek properties that only need touch-ups rather than major renovations. Homes with a good structure and good systems in place but are quite antiquated or unattractive frequently sell for a low enough price that you may turn a profit sprucing them up. This protects you from purchasing a home with more structural flaws than you anticipated and reduces your risk of losing money.
Set aside funds for the unexpected
Ensure you have additional cash on hand before buying a fixer-upper, because no matter how thoroughly you investigate a property before purchasing it, once you begin working on it, you will often discover faults that you were unaware of. As a result, having a large reserve fund is a smart idea so that you can fix or update whatever has to be done.
Retain the property for some time
Keeping the asset for less than a year will qualify it as a short-term capital gain in IRS record, subjecting you to capital gains tax at your marginal rate. Whereas if you hold on to the property for longer than a year, you qualify for the lower long-term capital tax gains.
Keep in mind that if you bought the property intending to rehab and sell it, you may not be able to do a tax-deferred exchange into your next home, and you may have to pay capital gains tax.
Have an alternative exit plan
With all that has been said thus far, it will be a disservice if you are not told that having an active and passive exit strategy is of great importance. Fixer-uppers are only worthwhile investments if you can recoup your initial investment plus profit.
In most circumstances, once the property has been made habitable, your primary exit strategy will be to sell it for a profit to a homebuyer. However, in the event you are unable to sell it right away, your secondary exit plan will be to rent it out, pending the time you make the sale.