Spending

4 smart money moves to make when buying a fixer-upper

Twenty/20

Nearly 68% of millennials say they would buy a home in need of major repairs, according to a 2019 survey from Clever, which polled 1,000 Americans planning to purchase a new home. But while buying a fixer-upper can seem like an attractive option for those eager to achieve the dream of homeownership, it's not always a good investment.

"With a fixer-upper, you absolutely have to factor in the significant costs of renovations that are going to be coming down the pike," says Dan DiClerico, a smart home expert from Angie's List.

Here are four moves to make if you're considering buying a home that needs a major overhaul.

1. Get a certified home inspection

Scheduling a home inspection is a normal part of the homebuying process, but experts say it's even more important with a fixer-upper. It's crucial that the home has "good bones about it," says certified financial planner Carolyn McClanahan, director of financial planning for Life Planning Partners in Jacksonville, Florida.

A good inspector will be able to flag issues that are expensive and/or tricky to fix, such as asbestos, mold, or cracks in the foundation, DeClerico says. Such problems, "could, and maybe should, be a deal breaker," he says. Tag along with the inspector so you can ask questions, he says.

Tim Ellis, the 2019 remodelers chair for the National Association of Home Builders, estimates that a quality home inspection will set you back anywhere from $300 to $600, depending on your location.

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2. Factor improvements into your budget

Make sure your cash flow can handle the added costs of buying a fixer-upper.

As a rule of thumb, homeowners spend between 2% to 5% of the purchase price of their home each year on basic maintenance and upkeep, explains DeClerico. But with a fixer-upper, you'll want to factor in "5% and then some," he adds, noting that a good estimate for the first year is 10% of the purchase price if the house is in need of major repairs.

When you're budgeting, ask yourself two key questions:

  1. What's your goal for the home? It can make sense to put more money into repairs "if it's a home that you know you want to make a forever home, or that you're going to live in for a very long time at least," says McClanahan, versus a starter home you plan to sell in a few years.
  2. How extensive are the renovations? If you won't be able to live in the home while work is in progress, you'll need to factor in the cost of living elsewhere. "It takes a lot longer than people think," she says. "If they tell you they'll be done in three months, then make it six. I've yet to meet a contractor that gets things done in time."
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3. Invest in energy efficiency upgrades

While improvements like insulation and new windows are "not going to wow anyone who walks through the door," Ellis says, "for operating expenses, it's a good way to start."

Investing in these type of projects can lead to significant savings. Salvador Nobre Veiga, a 32-year-old stock trader living in Pennsylvania, made upgrades in his home that cut his annual utility bills from around $2,200 to $750. All told, he invested $1,200 in upgrades that will pay for themselves in less than two years.

Lower bills can give you more wiggle room in your budget for other projects and improvements.

4. Weigh the cost of sweat equity

Part of the fun of buying a fixer-upper is putting your vision and passion into do-it-yourself projects. And a willingness to do so could save you a lot of money.

But be selective about what you tackle, or you might end up spending more in the long run. Experts recommend leaving projects involving electrical work, plumbing, and structural construction to the pros.

"My rule would be if you need a permit, you need a professional," says McClanahan.

And above all else, the experts agree, know what you're getting into before you get started on the work.

"If you've been watching HGTV, and you think you're just going to put up a back splash, and all of a sudden you're ripping out the walls because you've got to replace the wiring, that's the kind of scenario that you really need to avoid," says DiClerico.

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