Where do I start! It’s the #1 topic that comes up among the majority of my home buyers and also get togethers with friends! People are always curious to know what others think on the matter but never really hear about the little steps involved in the process. It’s a very big picture however buyers only see very expensive homes and figure why can’t I buy a cheaper one and renovate it myself to save money. It sounds like a great plan doesn’t it! It’s not that simple though! Besides rates being at rock bottom levels, I really believe this is another key factor as to why property prices are as high as they are. I’ll explain!
A basic example would be a house that’s worth $600,000 needing renovation vs $800,000 turn key home. The $600,000 home would need roughly between $120-$150,000 renovation depending on finishes so there is a potential for $50,000 profit. Based on 10% down payment, 2.6% fixed interest mortgage with a 25 year amortization on each property, ($60,000 and $80,000) a buyer would have a monthly payment of $2,157 on the $600,000 and $2,887 on the $800,000. There is a difference of $730 per month. As some may think that’s a huge amount of money, let’s actually look at it in detail. To get the $800,000 home that’s turn key (meaning you will have to do nothing but move in an enjoy vs having to do an entire renovation, hopefully under budget, on time and with not too much stress), you only had to pay an additional $20,000 down payment up front and the extra $730 a month. Even though you are paying much less monthly on the $600,000 property, you actually have to have in cash the $120-$150,000 to actually conduct the renovation needed and actually go through the renovation that will take months of time and of course stress. This is where many buyers fall short and decide to buy the more expensive property.
It’s only a very select few who have the equity to be able to do a renovation like this. Many buyers are forced to buy the more expensive property because they simply do not have the cash flow to go forward with a major renovation. I have personally been on both ends of the table and prefer the option to renovate myself as I love the construction process and personalizing everything to my taste and style. I did not start my home buying path this way however. It took me time to move up to this so buyers, remember that you have to pay your dues at first if you also do not have the cash!
Most buyers do not enjoy the process of renovations and some actually do not have the time having busy careers and children. It’s a difficult type of venture and I would be lying to you if I didn’t say I didn’t get some grey hairs because of it!
My advice to everyone: 1) be realistic as to what you qualify for (the key word is REALISTIC meaning you can afford it and you are aware it’s a huge undertaking in terms of time, money and stress) 2) if you can actually go the route of renovating (which I highly recommend because if done correctly, you can build the most equity long term), you have to decide how you are going to renovate! I just opened up a can of worms! I will be posting another article Wednesday, in continuation to explain renovating/project managing the renovation yourself vs hiring a contractor to take care of the entire project. The article will be posted before noon Wednesday, thank you for reading!
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