Why Problem Houses Are My Favorite Investment

Maybe you’ve seen The Money Pit, featuring a very young Tom Hanks playing a young husband trying to renovate an old house. The title should clue you in to things not going as planned for him.

But it doesn’t have to be that way- a “problem home” for one may be a business opportunity for another. What details should you focus on? What information should you obtain to make sure you don’t buy your own Money Pit? This post will walk you through why problem houses are actually some of my favorites for investment.

Know What You’re Getting Into

Since this is “flipping” a house, it obviously takes a large initial investment, and more cash inflows later. And, since these “problem homes” may have issues that are unlivable to the current owner, you’ll need the know-how and expertise to fix those issues and get the house back on the market. Once it’s listed, it could sit for some time before selling again, which is when you would finally make your profit.

And know that the problems you may see on the surface of your new investment, may expand once you dig deeper into renovation. In fixing one problem, you may create another. Want to rearrange the layout of your home? The support structure of the house may prevent you from creating the ideal layout you have in your head.

Expenses are Expensive

“Flipping” a problem home isn’t just re-doing the yard, replacing some flooring, and slapping some new paint on the walls. You’ll need serious investment into possibly fixing a roof, repairing a foundation, taking down walls, or moving a kitchen. The entire house may come down to its frame, and you need to be prepared for the costs related to your vision.

Some Problems You Just Can’t Fix Quickly

While a neighborhood could change for the better over time, the reality is that some problems can’t be fixed in a few months for some parts of the world. Crime rates, school districts, and local governments take time to change for the better, and it’s not an overnight process. If you’re planning on buying a problem home in one of these areas, proceed with caution- your investment may stay with you for some time. Doing your research- crime rates are available readily online - and knowing the area intimately that you are investing in will help you mitigate any costly blunders.

Find the Right Partners

Unless you’re Mr. Fix-It, you’ll want to hire the right help to make your dreams a reality. For one, working with someone you’ve dealt with before is the biggest risk aversion process out there. If you’ve seen them deliver work on time and to your standards, you’re in a good place. But working with a new partner creates uncertainty, and uncertainty could turn into more money out of your pocket.

When you’re buying a problem home, you may be branching out into areas of renovation that you’re not quite used to. For example, gutting and moving a bathroom isn’t the same as re-flooring the living room. Ask for referrals, and check out examples of previous work before committing to someone. And always get several quotes from different contractors before you choose.

The Rewards 

The obvious reward is buying a house at a bargain and selling high, in the shortest amount of time possible. By sticking to the budget, and finding the right partners, your investment can reap you a large reward. Maybe your first problem home takes a bit of time and a little extra money since you’re inexperienced- it’s building on this experience to reap even more cost savings and profits in the future.