Making Money in Real Estate with Fixer-Uppers
Photo by: Peter Gene
This is a guest article by Terry Sprouse, author of the book Fix ‘em Up, Rent ‘em out: How to Start Your Own House Fix-up and Rental Business in Your Spare Time.. For more information on the fixer-upper house business visit his blog at www.fixemup.org. He was formerly a Peace Corps Volunteer in Honduras. His hobbies include rainwater harvesting and solar energy projects. Interested in writing a Guest Post for Gather Little by Little please contact-me!
I started buying fixer-upper houses in 2002 when the economy was floundering and funding for my regular job uncertain. I wanted another source of income that would help fill in the gap in case my normal job fell apart. Years before, I had bought a real estate book that described how to buy and rent out houses, and in the back of my mind I thought I would one day try it too.
For my first investment, my wife and I bought a repossessed house, in need of repair, that was being sold through a real estate company for $84,900, we fixed it up and rented it out. At first the rent we charged was just equal to the amount we paid for the mortgage. Gradually, we raised the rents to the amount that other houses in the neighborhood were getting, and now we am making about $200 per month extra in rent over what we pay for the mortgage. And, the value of the house is now about $185,000, which is what a house down the street just sold for.
We have continued on in the fixer-upper business as a spare-time business, while still working our regular jobs. As you might imagine, with each new property we have found new ways to operate our fixer-upper business more efficiently.
A system that works
Buying lower-priced fix-up houses, using your own time & effort to fix them up (and that of friends and relatives), and renting them is a fairly low-risk, high reward way to generate wealth & security. The four chief benefits of purchasing fix-up houses are:
- If you buy a house in need of repair, you pay less for it than for a normal house. Since you paid less, you can take out a smaller loan and have lower monthly payments.
- By doing repairs yourself (as much as you are able to), you save money, and you learn valuable new repair skills.
- By renting it out, you get a house that is usually increasing in value (by an average 5% per year) the same time the rents are going up.
- When you get older, your loans will be paid off (or close to it) and the rents you receive are like an extra pension for your retirement.
Granted, it is hard work to find a house, make repairs and learn how to deal with tenants. But you also learn valuable technical and people management skills that you can use in other parts of your life, and pass along to others. Mostly, there is a great sense of satisfaction in your accomplishments, a stronger sense of security, and more income, which means more freedom.
Can it work in today’s market?
The higher prices and more-difficult-to-obtain loans presents of today’s housing market presents both challenges and opportunities. While prices are still high for houses, the good news is that they are dropping, and so are interest rates for loans. Good lower-priced fixer-uppers are already starting to appear on the Multiple Listing Service (MLS) and on the VA/HUD list.
Other options for investing
If you buy a house and live in it 2 out of 5 years, you can sell it and you are exempt from federal income taxes for up to $250,000 of profit (Internal Revenue Code 121). Many investors have become “serial sellers” who buy houses, repair them, and sell them every two years. Under this option you have the advantage of not having to deal with tenants. In addition to our rental properties, my wife and I are presently repairing a house to sell under IRC 121.
Another option is to utilize your existing home as a way to make money in real estate. If you have a basement, or some extra space in your house, you can convert those into rental space. A good book on the topic is Creating an Accessory Apartment by Patrick H. Hare & Jolene N. Ostler. Or, if you have a large yard, and city zoning allows it, you can build an extra unit or two for extra income.
Grow and learn
My wife and I have learned a lot since we began. We learned some things the easy way and others the hard way. One of the best parts of life involves growing and learning, and my spare time fixer-upper business allows me to do both, It doesn’t hurt that we make some money as well, and have some security for the future.