Why Buy A Fixer Upper Rental?

By buying a fixer-upper rental, you can get positive cash flow and a fast increase in equity. The downside? This can be a fair amount of work, and you have to be a landlord.

It is getting tough to have positive cash flow from rental homes, due to real estate prices going up faster than rent in most areas. One way to deal with this problem is to buy cheaper homes, to keep the loan payments down. These homes will usually need some fixing up.

What you want is houses in nice areas that are dirty and ugly. The more they scare off the usual buyers, the more likely you are to get a great price. However, you want to find homes that mostly need "quick fixes," like cleaning and painting and new carpet.

Let's suppose you are in an area where two-bedroom homes are selling for about $115,000, and the rents leave most new landlords breaking even or with slightly negative cash flow. This is a tough place to make money on rental homes.

On the other hand, suppose you buy a fixer-upper for $75,000, and after $12,000 in repairs and $3,000 in other costs it is ready to rent. Even if you refinance to get some of your cash back out of it, you will be borrowing $25,000 less than for similar homes in the area (you'll have a total of $90,000 into it versus $115,000 for other homes).

What does this mean? Your mortgage payment will be about $160 less per month. That can mean positive cash flow. You also have created $25,000 in equity if the home is now up to the standards of the other homes around it, and so worth $115,000. That means that if being a landlord doesn't suit you, you can sell the house for a nice profit.

Another way to boost that cash flow is to now lease the home and give the renter an option to buy. You will probably be able to get $150 more in rent, which helps the cash flow, and you may be able to sell at a higher price than market as well.

Bottom line? When cash flow seems impossible, start looking at those fixer upper rentals.