Many starting real estate investors make their first investment by buying a fixer. When the beginner is short
on cash, they might buy and improve the property with a little cash down and a large amount of their "sweat equity."
It's a good concept. Books have been written about it and it works almost anywhere
the investor lives. However, in most metropolitan areas, the objective requires more than a dream and drive. It also requires
the skills of evaluating the potential of the individual house and the general market where it will be purchased and resold.
When I began such investments, I had few construction skills over and above physical
stamina, but I could read and study how it's done. I have accumulated my successes on the shoulders of those before me.
The basics of the investment require:
1) The necessary cash for a down payment. This might be as low as 0% down but, usually, 5% or more. Knowing
how to find the best financing and making the pitch to the lender is a special skill all of its own. There are both institutional
and government loan programs, but many of the government loan programs come and go and have restrictive guidelines, so you
need to do your homework with the assistance of your realtor. Being able to get both a purchase loan and a rehab loan as the
total lending package solves the problem of not having enough cash to finish the renovation. (I have been able to get the
seller to carry the financing until the job was done, but this is a rare opportunity in an area like Los Angeles.)
2) Some understanding of how a house is built and can be remodelled. While no one should buy a house without hiring
an inspector, you can't rely on the inspector's opinion for everything, especially as an investment. The physical
inspection for a fixer should really begin before the offer is made. Knowing the difference between the serious and the superficial
problems is critical. It's probably not smart to start out buying a property with foundation problems unless they are
minor. It's best to have a roof that has some reasonable life left or, if needed to be replaced, doesn't require going
down to the rafters and starting all over. That can save thousands of dollars. The hired inspector will verify defects and
point out those you might miss.
Then there are all of the repairs between the foundation and the roof, such as
plumbing, electricity, general upgrading, etc. The type of work to be done might require more skills than you have. I always
assume that licensed contractors will do most of the work and calculate the costs accordingly before the purchase.
3) Determining what the market will be when you are ready to sell is the third leg of the investment formula. It's
also the most challenging. The evaluation tells you what your purchase price should be and how much you can afford to rehab
the house. It asks such questions as long are you planning to hold the property? If its your first and will be your home also,
you will need to hold it for at least two years to take advantage of the new IRS law.
If, on the other hand,
you want to get in and then get out, how quickly can you make the turnaround and will there be enough in the resell price
to justify the risk, effort and marketing costs? This takes an analysis of the work to be done and the real estate market
limits.
It's a given that you know when you buy the property what you can do with it. For example, if it's
zoned as a single-family area but you want to turn it into a duplex, then you wouldn't proceed. Or, more likely, if it's
an old house in a declared historic area, you want to be certain the necessary changes are allowed by the appropriate ordinance.
Many people don't understand that some uses by existing properties in an area may have been grandfathered in and such
uses are no longer permitted by current law.
Knowing the potential of the neighborhood where you are buying is
critical. As a realtor and an investor, I am amazed
at what is possible if the work is planned and the plan is worked. On the other hand, those who wing it, trusting the gods
that the project will pay off, astonish me. In an up market, you can survive. In an unsteady or down market, you would be
a fool not to analyze your investment before you commit. But in any market, it's wise to analyze the project before you
buy.
I have created a simple analysis for the investor and share both it and my experience
with my clients. There are always caveats with these generalizations. Beginner or experienced, let me know if you would like
to get started.
(No information given here should be used in your real estate
decision making without its confirmation by the proper authority.)
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