Fixer-uppers come in all shapes and sizes and degrees of work required to renovate them. The ideal candidate, especially for the moderate investor or beginner, would be a single-family residence (SFR) that simply needs cleaning up and some paint inside and out. Somewhat less than ideal would be a similar house but one needing substantially more capital and work than simply a paint job.

You might consider property that requires new carpeting, roof repair, or new kitchen and bathroom tile. More time and cost would be required on this kind of house, making it less attractive to buy. But the amount of work required to renovate doesn't matter (assuming the building is structurally sound), if you're not on a limited budget. You can profit on a fixer-upper, as long as you are willing to invest in the renovation and as long as you bought the property at a bargain price. If you have a limited budget, stick to investing in properties that require minimal funds for renovation.

Two-for-One Rule

For evaluating whether a property is worth fixing up, a rule of thumb is that every dollar invested in renovation should yield at least two dollars in increased property value. For example, you buy a house and spend a total of $4,000 renovating it. You should be able to realize at least $8,000 in gain after sale. Properties become run-down primarily owing to lack of care and adequate maintenance. Often the landscaping is overgrown, trash is strewn about inside and out, the place probably stinks to high heaven, and even a few windows are found to be broken. This shabby and unhealthy condition presents great possibilities for the investor. All this filth and destruction substantially reduce the value of this house. All you have to do is determine what it will cost to clean and renovate this property and the price for which you can reasonably sell it and earn a profit.

How to Know If a Property Is Undervalued

To be a successful real estate investor, you must evaluate potential acquisitions accurately. You have to know how to recognize a bargain when you see it, determine how much it will cost to renovate, then calculate how much you can honestly sell it for. Determining value, then, is the nuts and bolts of investing in real estate. Without proper appraisal techniques, you could be faced with the primary pitfall of real estate investment: paying too much for investment property.

You can easily overcome this pitfall by learning the local market. Once you know market values in your particular area and are fully informed of what properties are selling for, you can be more efficient at locating, and purchasing, a sound investment.

The number one priority in making an accurate appraisal is to know the market where you plan to invest. It is not only important to know the prices properties have sold for, but you should also be informed of asking prices. Without adequately knowing the market, you will be unable to accurately determine value.

Therefore, to become knowledgeable on local real estate values, start by doing your homework. Obtain a multiple listing service (MLS) book, which contains all listed property for sale in your friendly realty agent and especially take note of the price per square foot and raw land values.

There is a most important factor in quickly determining value of improved property. From your research of the MLS book, judge the range that property in your area sells for in terms of price per square foot. From this information alone, you can usually decide whether a property deserves further attention. For example, if you already know that you can sell a particular home at $50 per square foot of
living space, then you can be assured that if you buy it at $40 per square foot or less, you will have definitely made a good buy.

Additionally, you should become familiar with unimproved land values. What is the value of a vacant standard-sized residential lot, or a half-acre lot in your area? This information will become very important later on in your investment career.

Remember, you're better off with more land. If you don't have enough land, in the future you can't add on to the house or build an extra guest home onto the property, which will substantially add to the value of the property.

Besides the MLS book, you can also become familiar with local values by checking out open houses on weekends or reading through the local real estate want ads. The greatest risk of investing in real estate is paying too much for it. You can avoid this inherent pitfall by carefully analyzing the market before you buy. Well-informed investors know a good buy when they see one and, conversely, are fully aware if a property is overpriced.