Recession-Proof Investing with Fixer-Upper Rentals

Buying lower-priced fix-up houses, fixing them up using your own time and effort, and renting them out is a fairly low-risk, high-reward way to generate wealth and security. If you have been thinking about real estate investing, this may be a very good  time to do it.  There are many benefits in buying a fixer-upper and renting it out, especially in the current economic condition.

renovation

Photo by Rich115 via Flickr

The Four Chief Benefits of Investing in Fix-Up Houses

  1. When you buy a house in need of repair, you pay less for it than for a normal house. Since you paid less, you can take out a smaller loan and have lower monthly payments.
  2. By doing repairs yourself (as much as you are able to), you save money, and you learn valuable new repair skills.
  3. By renting, instead of flipping, you now own a house that is typically increasing in value (by an average 5% per year) the same time that the rental payments, and your monthly cash flow, are going up.
  4. When you approach retirement, your loans will be paid off (or close to it) and the now-higher rents that you continue to receive are like an extra pension for your retirement. For people who rely on stocks for retirement, that loud sucking sound they hear is the dollars flying out of their portfolio.

What About The Pitfalls?

Pitfalls to buying in fixer-upper houses, such as broken plumbing systems, worn out electrical wiring, and cracked foundations can be avoided with the help of a professional inspector. Once identified, these conditions can laid out before the seller, who must either fix the problems to your satisfaction, or you can pull out of the deal.

Of course, it takes hard work to find a house, make all of the repairs, and learn how to deal with tenants. If it were easy, everyone would be doing it. You’ll learn not to take life, or tenant problems, too seriously. Shakespeare said, “A light heart lives long.”

The good news is that before long your real estate business will be running like a Swiss watch, as you learn valuable technical and people management skills that are useful in many other aspects of your life. You are also rewarded with a feeling of satisfaction in your accomplishments, a stronger sense of financial security, and the peace of mind that accompanies it.

Fixer-Uppers + Recession = Opportunity

The time to buy in real estate is when prices are low and soft, and when interest rates are low. If that sounds like the present situation we are in, you’re right. In general, recession may be a good thing for fixer-upper investors for two reasons:

  1. Many people are reluctant to buy houses, or make any big purchases, until the economy picks up. This drives up demand for rental properties by tenants, and allows rental property owners to raise prices.
  2. Since demand is low and supply is high for existing houses, prices are dropping. This combined with the large number of foreclosed properties coming on the market, makes it an opportune time for investors to accumulate more rental properties.

This could be a once-in-a-blue-moon opportunity, and as Thomas Edison said, “Opportunity is missed by most people because it is dressed in overalls and looks like work.”

Here are additional articles written by Terry:

About the Author

By , on Sep 11, 2008
Terry Sprouse
Terry Sprouse formerly worked at the University of Arizona for 10 years. During that time, he started a business in his spare time buying fixer-upper houses and turning them into rental properties. In addition to his real estate business, he also writes books about real estate investing and how to become self-reliant, rather than relying on a 9-5:00 job for security. He is the author of Fix em Up, Rent em Out, and most recently, Carve Out Your Niche. He also the author of Fix em Up Rent em Out.

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Leave Your Comment (25 Comments)

  1. MITBeta says:

    Matt beat me to it. The supply of rental property will drop as more are forced out due to evictions and foreclosures.

  2. Matt says:

    @ David

    That’s ironic b/c the renters would likely be homeless if they all followed that methodology. It’s one thing to keep rents at flatline for a few years but it’s another to lower rates.

    Sad thing is rent prices will likely go up in the upcoming years considering it’s more difficult to buy a home due to tightening lending practices. People might actually have to save for a down payment. Perish the thought.

  3. David says:

    Speaking of the “landlord factor”, which adds to the mental price of owning a rental property, here is an add I just pulled off of craigslist….

    “All of you property owners need to realize that your value’s are going down, which translates into you not being able to charge as much. Either drop your rent and find a tenant or stop posting the same crap! I think renters need to organize, if we operate like a union land lords will have no choice!”

    Yeah there’s a good tenant.

  4. Harry,

    You don’t have to be an American citizen to purchase U.S. real estate, and you don’t have to form a LLC. If you use an LLC, the LLC would have to quality for the loan.

    I have a real estate agent friend, Bob Zachmeier, who has worked on these bi-national deals before. If you would like to follow up with him with further questions, his contact information is at
    http://www.incredibleagents.co.....index.html

    Good luck!

  5. harry says:

    does anyone know if it is possible to buy a house in the US whilst not an US citizen? I’m european and I’d like to get my hands on some (almost) foreclosed property but can’t seem to find some info on how to do that. Could I maybe start a Limited (legal thingy) that’d buy the houses for me?

  6. Teia,

    Thanks for that comment.

    I looked at your website and noticed that Homevestors has lists of homes that they sell to other investors. And, of particular interest to me, many of the properties were fixer-upper houses. This looks like a good resource for fixer-upper investors.

  7. Teia VanHorn says:

    This is what we do at Homevestors and it works great! We get a managment company to manage our rentals. We also were able to negotiate a rental managment discount since we have so many rentals. Sec 8 rentals can be good and bad just like with any renter, you should screen anyone living in your houses.

  8. Mary Jane,

    Thanks for that comment.

    Section 8, also known as the Housing Choice Voucher Program, is a Federal assistance program administered by Housing and Urban Development (HUD). As you know, the program is dedicated to sponsoring subsidized housing for low-income families and individuals, and it is available in all 50 states.

    I have never had Section 8 tenants in my rental properties, but I know that an advantage of these tenants is that since they get their rental money from the federal government, paying the rent is not a problem.

    However, even though they must qualify to get into the Section 8 program, if it were me, I would still run a background check on them. The more information you have on a tenant the better.

  9. Mary Jane says:

    Dear Terry,

    Thank you for the information that you have given to us. Terry do they have the Section 8 for low income family all over the U.S or is it just in Florida. I know some one that’s involve in Section 8 and I heard it is good for both tenant and landlord.

  10. Pinyo says:

    @Terry — Thank you for your answer.

  11. Pinyo,

    You’re welcome. It’s an honor and a pleasure to do a guest post on your blog.

    In answer to your question, I haven’t noticed any change in rent collection since the eonomy took a nose dive. I screen my tenants pretty carefully at the beginning. I try to get tenants that have a stable job and are financially responsible.

    Matt,

    Thanks for sharing that link.

  12. Matt says:

    Terry,

    Here’s a link (hope that’s OK w/ Pinyo). I’m looking at grad student of professional student type tenants instead of the undergrads.

    http://steadfastfinances.com/b.....lege-town/

  13. Pinyo says:

    @Terry — Thank you for the guest post. Personally, I don’t invest in real estate because NYS law strongly favor tenants and I am just not handy enough to fix some of the common problems. However, I know there’s a lot to be gained by becoming a landlord.

    Regarding recession, do you find it harder collecting rent in bad economy?

  14. Connie,

    Thanks for chiming in with those insightful comments.

    Terry

  15. Matt,

    College towns are great for investment in rentals, for the reason you mention, an endless supply of renters. Some people don’t like to rent to students because of the turnover, and because of their reputation for not taking care of the property. However, I think the advantages outweigh the disadvantages.

    I checked your webpage but am not sure which article you are referring to.

  16. Matt says:

    Terry,

    What are your thoughts about investing in a college town? I’m looking for areas with high demand for rentals, and I can’t think of a better place for year around demand. Plus, you got a new crop of renters coming in every fall.

    I’ve written an article at my blog if you’re interested. I didn’t want to post a link here in the comments b/c it’s not my blog – respect thing!.

  17. edzillion,

    I think your argument applies more to people who want to flip, rather then those of us who buy and hold. Since I hold my properties for the long-term, the value (or sales price) of a house that I own doesn’t affect my monthly rental income.

    Granted the economy is weak, but that is usually the time when most real estate investors are jumping in to buy properties. We buy when prices are low.

    FFB,

    I haven’t done a comparative study of states, but my impression is that most states write laws to protect the tenants. I find that many tenants are unaware of the rights and protections that they do have. I like to read through the rental contract with them before they sign it, so that they are aware of their rights and responsibilities.

    passivefamilyincome,

    In Arizona, where I live, a similar situation exists where demand is high for rentals. While rental rates historically climb, for the last few years I have found that rents are going up faster than normal. It’s a great time to own rental properties. And, in the long-term, people will always be people who need to rent a place to stay.

    I suggest you read my article “Buy, Repair & Rent – How to Make Money in a Slow Real Estate Market”
    at http://ezinearticles.com/?Buy,.....id=1459075

  18. ConnieBrz says:

    Investing in rent houses certainly isn’t for everyone, but it’s been very good to our family, thanksmuch. When everyone else was off enjoying sky-high appreciation, we were steadily building our portfolio of fixer rentals in much the same way Terry describes both here, in his excellent article, and in his book. It’s a simple strategy, but certainly not quick or necessarily easy.

    Still, for those who’re willing to do their homework, learn the business, and invest for positive cashflow and long-term appreciation, the risk can be very low. And Terry is a fantastic resource to anyone who wants to learn.

  19. I would like to add a rental property to my existing passive income streams, but am still a little reluctant. The area of the US that I live in actually has a very high demand for rentals because people are relocating here from the north and can’t sell their homes back home.

  20. Glen Craig says:

    Are there better states to buy in? What I mean is I’ve heard some states have better laws to protect landlords while others are better at protecting the tenant.

  21. edzillion says:

    This is totally ridiculous.
    Low risk? I think not, especially when you can’t budget since you can’t predict what the housing market will be like when you have finished fixing up.

  22. Matt,

    I’ve read about the looters stealing metal from new houses. I agree, it sounds like a great niche business to go back in and replace the wiring & other metal.

    MITBeta

    I recommend reading my article “Six Guaranteed Ways For Landlords To Lose Money And Have Terminator-Type Tenants” at http://ezinearticles.com/?Six-.....id=1076846, to see how I sucessfully deal with tenants.

    Andy,

    I think the economic playing field is tilted against flipping and tilted in favor of the “buy, hold and rent” strategy that I describe. Not to say you can’t flip. I know people who do. But, it’s easier to swim with the stream rather than against it.

    My father used to tell me “As you walk throught the cow pasture of life, you’re bound to step into the truth once in awhile.” The truth I see is go with the flow of the economy.

  23. Andy says:

    This is only for people who know property and have past (success) experience in flipping. Otherwise a very risky way to make money.

  24. MITBeta says:

    This article completely ignores the trials and tribulations of being a landlord…

  25. Matt says:

    CNBC ran a story several days ago on bank owned properties that had been stripped, and subsequently damaged, by looters for copper wire and scrap metal in southern California in the $25k range. Several years ago, these homes would have gone for $400k. All that they really required was an electrician for rewiring, and a drywall crew… the rest was just basic clean up type work.

    If you’ve got the know how and moxie, or have a biz arrangement w/ a contractor you trust, there is some serious cash to be made here.

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