Vacation Rental Owners

Fixer-Upper Vacation Rentals: Are They Worth It? (Usually!)

Fixer-Upper Vacation Rentals: Are They Worth It?

The low price tag that comes with a fixer-upper has plenty of allure. But with all the time, effort, and money you’ll be putting into the property, is it really worth it? In this article, we’ll cover various considerations to keep in mind when thinking about purchasing a fixer-upper to serve as a vacation rental property. We’ll also talk about estimating the costs, as well as some of the pros and cons associated with buying a fixer-upper property.

What to Consider

If you want to find the perfect fixer-upper for your vacation rental business, there are several things you’ll want to keep in mind.

Your Own Limitations

Before you jump into purchasing a fixer-upper, you need to be realistic and honest with yourself about what you can take on. Do you have the capacity to handle a house that needs to be gutted and rebuilt completely? Or are you looking for a place that mainly needs cosmetic fixes? When looking at fixer-uppers, be aware that structural issues will take extra time, effort, and money to fix up.

The Location

Where the fixer-upper is located is just as important as the house itself and the potential you see in it. Does the area have reasonable supply and high demand? Is the neighborhood safe? Is the property close to restaurants, grocery stores, nightlife, and events? For more information on determining a good location, check out our article on the topic here.

Your Goals and Plans

Don’t jump into buying a fixer-upper without a solid plan in place! Set goals and create step-by-step strategies to achieve them, rather than going in blind.

Your Budget

Fixer-uppers are notorious for going over budget, so factor that in when you’re planning out your estimated costs. Try to keep your budget as realistic as possible, rather than being overly optimistic about how much all of the repairs and renovations will cost. You’ll need a cushion of at least 10% to 20% more than you expect to pay for the project.

Plans for Payment

Plans for Payment

How large is your budget? For a home that mainly needs cosmetic changes, you should be able to qualify for a conventional loan. With this type of loan, you’ll need to consider how much of your savings you can use for the down payment and closing costs. You’ll also need to remember to set aside some savings for repairs. But if you’re purchasing a home that needs significant repairs, or one with structural issues, then you’ll need a renovation loan instead of a conventional loan.

Hiring a Team

It can be tempting to go with the cheapest option, but typically, this isn’t worth it. It’s better to choose more experienced contractors to do the job right (and the way you want it) the first time around. Plus, professional contractors will know what types of permits are necessary, and they’ll ensure everything is up to code.

Estimating the Costs

It’s nearly impossible to accurately assess all the costs involved in fixing up a house, but there are a few steps you can take to make your estimate as close as possible. First, you’ll want to consider various specialized home inspections before you close on the sale of the house. These could include a pest inspection, a sewer line scope and septic tank inspection, and thermal imaging.

Identify the aspects of the house that need to be fixed or changed immediately, as well as the projects that can be done later on. Think about which projects will need to be done by professionals, and which you can take on yourself as DIY projects. If possible, try to price all of the renovations before you make an offer. This way, you can factor everything into your budget.

Another thing to remember is that you’ll have to pay for various permits, so add those into your budget as well.

Estimating the Costs

If you’re considering purchasing a house that will require major structural work, you should only go through with the purchase if you’re getting the home at a steep discount. You’ll also need to be sure that you understand the full extent of the problem and that it can be fixed. It’s wise to have a binding written estimate for the repairs, get pre-approved for loans, calculate your fair purchase offer, and include inspections contingencies before proceeding with this type of fixer-upper.

The Advantages

Below, find the major advantages of purchasing a fixer-upper to serve as a vacation rental property.

Lower Sale Price

Of course, a huge benefit of choosing a fixer-upper is that it typically comes with a much lower sale price than the average home. This can be very attractive if you have a limited budget. However, you should note that all of the repairs and renovations you’ll be doing are likely to make the price as much as or even more than a house that wasn’t a fixer-upper. You could potentially spend more than you save.

Lower Property Taxes

Depending on the state and local market, property value is usually assessed every five to seven years. This means that if you purchase a fixer-upper shortly after it has been assessed, you may get to enjoy lower property taxes on the home for a few years until it’s reassessed. In addition, there are various considerations for tax breaks on vacation rental properties. Renovations and repairs can be partially and sometimes completely written off during tax season, but you’ll need to consult with your tax preparer or CPA to ensure this is the case.

Completely Customizable

The fun part of renovating a fixer-upper is that you can completely customize it to be exactly as you want it to be. Still, you’ll need to keep your guests at the forefront of your design at all times, rather than creating your own dream home, if you want to have a successful vacation rental property.

Value Appreciation

Value Appreciation

Remodeling and renovating a fixer-upper will quickly result in appreciation of the home’s value. Whether you fix structural issues, renovate the bathrooms, add pet-friendly flooring, or make any other improvements, they’re sure to add to the home’s value if you plan to sell it in the future.

The Drawbacks

There’s a downside to every home improvement project, and this is true for fixer-uppers as well.

Significant Time and Effort

Even if you’re outsourcing the work to professionals, you’re going to be putting in a very significant amount of time, effort, and money to renovate a fixer-upper. It’s essential to think about how much time you can realistically commit, and what you may have to give up for the time being to make time for everything you need to get done. Overall, fixing up a vacation rental often takes months, and depending on how the schedule pans out, you could even end up working on the home during peak season–meaning you’re missing out on some of the year’s potential profits.

Won’t See Profit Immediately

Think about it this way: Every day that you’re working on the house is another day that you can’t earn income from guests. Expect to spend several months pouring money, time, and effort into the home without immediately getting anything back.

Unexpected Problems

Often, owners of fixer-uppers aren’t fully aware of the extent of the house’s issues until they’ve jumped into the renovation process. It’s common to hear about problems failing to present themselves until walls have been knocked down and contractors have begun to work on the house. If you choose to purchase a fixer-upper, then you’re nearly guaranteed to have unforeseen issues pop up throughout the process.

Changing Timelines and Budgets

It’s rare (and perhaps even unheard of) for a fixer-upper to stick to the original budget and timeline. Issues may pop up that cost more money than expected, and projects may take longer than anticipated. It’s important to expect the unexpected when working on a fixer-upper.

Local Laws and Restrictions

Local Laws and Restrictions

Depending on your location, you may run into problems regarding local laws and restrictions. This is especially true if your fixer-upper is located in a historic area. You’ll need to get all of the proper permits according to local rules, and these permits can be expensive.

Initial Time Spent Vacant

As mentioned above, you won’t immediately turn a profit when you purchase a fixer-upper for your vacation rental property. There will be an initial period of at least a few months when the house will remain vacant. However, you can potentially turn this into an opportunity to market your up-and-coming vacation rental property. Doing this properly can generate interest in your vacation rental so that once it’s up and running, there will be several guests ready to book a stay.

Main Takeaways

  • Before you buy a fixer-upper, consider your own limitations, the property’s location, your goals and budget, payment plans, and whether you want to hire a team.
  • Specialized home inspections can help you estimate the cost of repairs and renovations. You’ll also want to think about whether you can DIY any projects. Don’t forget about the cost of permits!
  • Advantages of purchasing a fixer-upper are the low sale price and property taxes, as well as the fact that it’s completely customizable. Plus, the home’s value will appreciate, which is great if you’re planning on reselling the property in the future.
  • The drawbacks are that you’ll need to put in a significant amount of time, effort and money, and that you won’t see profit right away. There are likely to be unexpected problems that result in changing timelines and budgets. There are also local laws and restrictions to consider, as well as the initial time spent vacant.
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