December 09, 2008

Investment Properties: How much is too much when it comes to fix-ups?

Eight years ago my wife and I bought our first investment property with the plans of fixing it up and selling it for a profit. It seemed like a perfect scenario because we were able to buy the home for only $104,000 and it already appraised in its current condition for $135,000. The only problem was that it needed some cosmetic work to get it to sell for what it was worth, things like new carpet (and pad -to get rid of the smell), new paint, a bit of yard work and other similar things. However, we also knew that if we did a little more, it was worth between $160,000 and $165,000. The yard really needed sod, not just weeded beds and the windows could definitely be replaced. The basement was unfinished and it would only cost about $5,000 in materials to finish it and since we planned on doing all the work, it would be pure profit. But before we knew it, we had spent 6 months working on the home while paying the mortgage and materials. And then we spent another 3 months lowering the price to get it to sell. We finally sold it for $154,000 and when all the closing costs were paid and we subtracted the materials, the mortgage payments and other expenses from the profit, we were left with $3,000 which ironically was exactly enough to cover the cost of the tools we “had” to buy to do the work ourselves.

It was a bit discouraging to see that we didn’t make money on that insane amount of work, but I had two choices. I could either look at it as a huge waste of my time, or I could consider it great and free education. Honestly, how many people work just as hard at college and they graduate with a large student loan debt? At least mine was only the hard work. But I started thinking, had I just gone in and done the basics and left the basement unfinished, I could have listed it below all the other homes in that neighborhood (for 130K) and had it sold quickly AND made a profit of around $15,000! Instead I priced it high and spent a lot of time, an incredible amount of effort and too much money only to keep lowering the price to get someone to buy.

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