Pros and cons: What to consider before buying a fixer upper

If home improvement is your passion, you may feel tempted to snap up “the worst house in the best street” at a bargain basement price and fix it up yourself. While you could “flip” a fixer-upper house to sell at an auction, you could also transform it into an investment property to rent out, or a home you’d be happy to live in.

But there’s more to fixing up a fixer upper than what you see on renovation TV shows. Before you roll up your sleeves, you may want to consider some of the potential pros and cons, as well as some of the other considerations that may be involved in your project.

Pros and cons of buying a fixer upper

Pros 

• Pay less: A fixer-upper’s purchase price can often start lower than those of other established houses. There may also be less competition from other buyers because of the work involved, and more room for negotiation. And when you pay less for a property, you may also pay less in stamp duty.
• Quickly build your equity: Fixing up an older property may help to improve its value more quickly than making extra repayments and waiting for capital growth over time. This could allow you to access this equity sooner, whether to refinance your mortgage, access a line of credit, or even purchase another property.
• Put your mark on the property: Purchasing an existing property often means having to live with the previous owner’s decisions around the home’s look and feel, which may not match your own preferences. Fixing up a property means you can make your own design and décor choices, whether you’re building a home to live in, rent out, or sell.

Cons

• Costs time, money, and stress: The magic of TV editing can make renovating a house seem like a fun project that can be taken care of over a long weekend. In reality, you may find that it can drive your physical and mental health, your relationships, and your budget to breaking point. Make sure you’re prepared, and consider getting help from experts, such as an architect or project manager.  
• Overcapitalising is a risk: Spending too much money on renovations that may not help increase the property’s value is called overcapitalising. If the property sells at auction for less than you expected, or if you struggle to find tenants to rent an investment property, you may find it difficult to recover the money you spent.   
• Financing may not be easy: Some mortgage lenders aren’t willing to provide a standard home loan to buy properties that require substantial renovation work, as they may not retain enough value to fulfil a lender’s loan to value ratio (LVR) requirements, and may be much harder to sell if you default on your repayments. 

What to consider before buying a fixer-upper

How much time and work is involved?

If the property you’re looking at has “good bones”, you may largely need to make some cosmetic upgrades to get it into condition. But bigger projects that involve more specialist trade expertise, such as rearranging the layout of the floorplan, adding extensions, or repairing underlying structural problems, could end up costing you more time and money.

Consider getting a building and pest inspection before committing to a fixer upper, as this can help you find any hidden problems that could complicate your plans.

Are there council restrictions to consider?

Depending on the scope of your project, you may need to apply for council approval before you can start renovating a property. There may also be limits on how many storeys the building can have, how far it can be extended, or what can be done with the trees and landscaping.  

What’s your budget?

While some TV renovators are notorious for blowing out their budgets, you may not have that luxury. Before your property project becomes a money pit, think about what work will be involved, consider getting multiple quotes from qualified tradespeople, and plan your budget accordingly. Consider keeping a contingency buffer in your budget (such as, say, ten per cent) to help take care of unexpected expenses.

Where will you be staying during the project?

Living in a property that’s currently under construction may not be comfortable for you or your loved ones. Depending on your situation, it may be worth looking at alternative accommodation options while the work is taking place, even if that means relocating elsewhere for some time.

How do you plan to pay for the project?

There are a few finance options you may be able to consider to renovate a fixer upper, with the best choice depending on your personal financial situation.

If you already own your home or an investment property, you may be able to refinance that loan to access the equity in that property to pay for the renovation of a second. You may be able to access your equity as a lump sum or a line of credit.  

A construction loan could be an option to consider for a larger-scale project that’s closer to a full rebuild. Rather than borrowing money as a lump sum and paying interest on the full amount, a construction loan is where you draw down money to pay for each stage of the construction project as it’s completed. This means that the bank or mortgage lender may be more involved with your construction project, and make regular valuations over the course of the project. You’ll also need to engage qualified and licensed builders and tradies, as you likely won’t be able to get a construction loan as an owner-builder.  

Another potential option could be to apply for a personal loan for home improvement, whether as a lump sum or a line of credit. This can let you keep your renovation budget separate from your home loan, which may put more flexibility into your personal finances. Keep in mind that the better your credit score, the better the interest rate you may be approved for on a personal loan.

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