Purchasing a home is a tenet of the American Dream. That’s evident by the United States’ construction market, which is the second-largest in the world and encompasses a 10% market share. However, not everyone can afford to construct a brand new house, especially millennials — who are loaded with student debt. That’s why fixer-upper homes are becoming popular, with some major help from reality property-flipping TV shows.
Before you leap into a fixer-upper home commitment, however, it’s important to realize that it’s not as easy as it looks on TV. Taking on an expansive home remodeling project requires thorough research, quality inspection, and professional advice if you don’t want to end up in a financial mess.
What is a Fixer-Upper Home?
For many years, the pervasive trend has been to buy a house that’s listed below market value because it’s in need of significant repair or enhancement. Homes like this can be improved with renovation and repair that greatly increase their market value, helping the owner establish themselves in the real estate market. Although you can end up saving quite a bit when you buy a fixer-upper instead of a turnkey new build, renovating a fixer-upper often requires more money than you might think. You’ll want to make sure you buy a house with renovation needs you can actually afford and plan to spend more than you initially anticipate.
What Are You Looking For in a Home?
Before you shop for a house, ask yourself what’s really important. Are you simply looking to save money? Or do you care about the neighborhood and its surrounding amenities? Think about whether or not you have a desire to personalize the home and how much that might cost you. Some people buy fixer-upper homes simply because they enjoy taking on a large project. Others buy them without realizing the amount of work they’re getting themselves into.
What Are Your Financial Resources and Restraints?
While it’s possible to fix up a low-value home and earn a return on your investment, it’s also a pricey process. The most expensive types of renovation are generally structural, which is why an inspector is so important. You may not have enough in your budget to repair a surprise cracked foundation or remove hidden asbestos. Figure out how much you’re willing to put into repairing a house and then select one that will have the highest return on investment (ROI).
It’s also important that you understand which projects you can do yourself (and save money) versus which projects are better left to a professional (which could save you from costly mistakes). If you qualify, check for government-subsidized programs in your area that help consumers purchase fixer-upper houses.
Will You Earn Back the Money You Spend?
Like the stock market, the real estate market can help you earn money. In fact, real estate has outpaced the stock market by 2:1 since the year 2000. If you’re entering the real estate game with a fixer-upper, research which home improvements will give you the largest return on investment (ROI). Home value is generally broken into these percentages:
- Finished attics or basements – 10-15%
- Kitchens – 10-15%
- Full bathrooms – 5-10%
- Half bathrooms – 5%
When planning renovations, estimate each room’s current value based on these percentages and your home’s total value. A good rule of thumb is to avoid spending more than this amount on that room’s renovation in order to avoid loss.
Which Renovations Earn Back the Most Money?
These common renovations can significantly increase your home’s value:
Minor Bathroom Remodel
With an average ROI of 102%, minor bathroom renovations can earn you big bucks. And it doesn’t even take that much work. Adding a simple fresh look (like replacing a shower head with a rain shower or updating lighting) may attract buyers and increase home value.
Upgrading the front and back yards of a home can bring in a 100% ROI. A huge landscaping project isn’t necessary to achieve an attractive outdoor setting. Simple landscaping designs that incorporate clean and trimmed lines add curb appeal.
Minor Kitchen Remodel
Similar to the bathroom, the kitchen doesn’t need to be gutted to add to your home’s value. A minor kitchen remodel that includes appliance upgrades, refinished cabinets, and new hardware can create a 98.5% ROI.
Garage Door Installation
It may seem too simple, but installing a new garage door really adds to your home’s value. Even a discounted door can help you make a profit. This project has an average ROI of about 98.3%.
Entry Door Replacement
First impressions matter, so install a solid and attractive steel entry door for an ROI of about 91.3%.
Major Bathroom Remodel
If you’re set on bigger results in the bathroom, a major bathroom remodel still has a great ROI (around 93.2%). To maximize your ROI, base the bathroom design on universal design, meaning it’s accessible and attractive to people of all ages and abilities. Stick with natural colors, updated and attractive fixtures, and lots of lighting.
Major Kitchen Remodel
A major kitchen renovation means starting fresh with everything. The best step you can take in this area is to remove walls that block it off from other areas of the house. This creates an open space and allows the kitchen to serve as a family home base. Houses with an open kitchen generally have greater value. Expect an ROI around 91% for a full kitchen remodel.
Deck, Patio, or Porch Addition
Beyond the landscape, adding a deck, patio, or porch to your home’s outdoor area contributes to its attractiveness and offers outdoor living space. For best results, install a clearly defined patio that’s easily accessible and easy to care for. Additions like a fire pit, outdoor kitchen, flagstone pavers, and sliding door access to the home are great ideas, too.
Which Renovations Should You Avoid?
When shopping for a fixer-upper and planning your budget, there are some projects that should probably be avoided because they can become cost-prohibitive. As you shop the market, look for houses that won’t require siding, foundation, deck, or septic work. Mold or asbestos removal can be quite expensive, too. Though a little less expensive, electrical, water tank, and HVAC renovation can quickly become pricey endeavors.
When it comes to ROI, some projects are worth it while others won’t give you much return. If you want to earn money with a fixer-upper, it’s best to avoid anything “upscale,” like a grand entranceway or expensive bathroom and kitchen fixtures. Stick with universal design — simplicity and accessibility — for the best ROIs.
Still Think a Fixer-Upper Is for You?
There’s a lot to learn before you go out and buy your first fixer-upper home, so avoid making decisions on a whim. Look at many houses and compare their total revamp costs before choosing one. The good news is that the remodeling industry is expected to grow by 2% per year until at least 2025. It really is a great time to enter the real estate market, and you can enjoy the benefits of a fixer-upper home if you take the right steps along the way.