Investing in a fixer-upper

The current housing market offers some great opportunities for those interested in buying a fixer-upper. The combination of low housing prices and mortgage rates, plus depressed demand for skilled labor and building materials, makes it an attractive time for buying a fixer-upper if you have the time, money and inclination to take one on.

The money part of the equation will be a challenge for many. For those looking for an investment, it used to be fairly easy to tap your home equity to come up with a down payment and money for repairs. These days, however, lending standards are much stricter. If you want to borrow against your current home, you'll need to have significant equity in it, and that's after accounting for any losses in value over the past three years.

If you do decide to try and take out a second mortgage on your current home to invest in a fixer-upper, remember that you need to do more than just come up with the down payment. You'll also need money for repairs, as well as to cover the mortgage payments on the new property for however long it takes you to fix it up and either start renting it out or sell it.

You may be better off seeking alternate forms of financing rather than putting your home at risk by tapping your mortgage - if the investment falls through, you could end up losing your house if you can't make the increased mortgage payments.

FHA loan program for fixer-uppers

If you're planning to live in your fixer-upper, however, the FHA has a program designed to help you both purchase and fix up a home through a single mortgage. Called a 203(k) mortgage, it allows you to finance both the purchase of a home and the cost of remodeling through a single loan. However, you'll probably need to hire a contractor to do the work in order to qualify - even if you do the work yourself, you still need to account for the cost of your own labor and the work must be completed within a specified time - which can be a major challenge for do-it-yourselfers.

If you decide that you do want to take on a fixer-upper, remember that basic rule of real estate - location, location, location. Look for a place in a neighborhood where you're likely to get a good return on your investment, either as owner-occupant, landlord or seller.

You also want to find the right type of house. Homes with 3-4 bedrooms and 2 or more bathrooms seem to make the best investments, because they appeal to a wide range of buyers. Particularly in older homes, don't forget to look for closet space as well - older homes in particular may be surprisingly short on storage space, and it's very hard to add in a renovation without knocking out walls. Don't plan on expanding by adding one or more rooms, unless you love the property and that's what it takes to make it perfect, or it's a small house in a high-demand neighborhood.

Take a look at foreclosures

Foreclosed properties can offer a good opportunity for fixer-uppers. Foreclosures don't just happen in run-down neighborhoods, particularly these days. With people from every income level losing their jobs or seeing their businesses fail, foreclosures can be found in every type of neighborhood and price range. Foreclosed homes often make good fixer-uppers because of deferred maintenance the previous owner put off due to financial difficulties. If these repairs are superficial, you can come out ahead, particularly when you consider that foreclosures typically sell at a modest discount compared to other properties.

Look for properties with "good bones" - that is, homes that are basically sound but require cosmetic work to make them shine. Avoid properties that have problems with the roof, foundation, mold, plumbing or electrical system - those are among the most expensive items to fix. Inexpensive repairs include paint, interior walls, refinishing or carpeting floors (including replacing water-damaged bathroom floors) and refinishing or replacing kitchen cabinets.

Stay within neighborhood norms

One of the most common, and expensive, mistakes people make is to renovate a home above and beyond the neighborhood it's in. You don't want to end up with the only $300,000 house in a $150,000 neigborhood - but many people go right ahead and add expensive tilework, hot tubs, high-grade appliances and other improvements above and beyond other properties on the block. The idea is to bring a depressed property back in line with those around it, not push it above and beyond its neighbors.

Remember, the key is to get maximum return for minimum investment, regardless of whether you're looking at an investment or a place to live. Keep that in mind and you can end up with a great home at a bargain price or a profitable investment - forget it and you could find yourself with a costly mistake.