Difference Between a Fixer-Upper and Rehabbing a Property

It’s easier to complete home renovation projects without a hitch when you know what you're actually embarking on. For instance, you may have come across the terms "fixer-upper" and "rehab," while we sometimes use these interchangeably, there are distinct differences between the two. So to avoid letting you bite off more than you can chew, we’re exploring the differences and highlighting the risks of rehabbing a property below:

Difference Between a Fixer-Upper and Rehabbing a Property

Working with Licensed Contractors

Since these properties typically require only minor repairs and updates, most property owners prefer to cut costs by relying on DIY skills to put the house in shape. In other words, instead of hiring multiple professionals like landscapers, painters, or plumbers, you can easily plant a few flowers, repaint the walls, and grab a wrench from the hardware store.

On the other hand, rehabbing a property is a complete overhaul that includes extensive renovations that exceed your DIY skills unless you're a contractor. Even then, you might still need other professionals to weigh in on sensitive areas like the foundation work, removing existing walls to create new rooms, or adding exterior spaces like a patio.

Scope of Work

Put your property back on the market after repainting the walls and replacing the kitchen hardware. With fixer-uppers, minor cosmetic changes can make a huge difference because these properties aren't severely dilapidated, making it an accessible project for inexperienced DIYers or handy investors.

In contrast, rehabbing a property involves more complex renovations that require specialized expertise. It typically involves more structural repairs and system upgrades that expand the scope of work beyond your basic DIY skills.

Timeline

Get your money back within months of purchasing and making cosmetic changes to your fixer-upper. After all, it only requires minor updates that you can turn over in a few weeks with the right skills and planning. Maryland Hard Money Lenders suggests promoting the property immediately to attract potential buyers, reducing your timeline to a couple of months.

However, rehabbing a property is a more time-consuming and expensive process. Depending on the projects you're taking on, a complete overhaul could take several months due to complexities like getting permits, contracting construction workers, and time needed to finish the work. As a result, there's more room for delays that can run up your completion date and budget.

Risks of Rehabbing a Property

Reduced Selling Pricing

Stay up-to-date with current market trends to avoid selling your property at a loss. Rehabbing a property is an extensive project that often requires several months, allowing market fluctuations to eat into your earnings. That's why it's essential to make a plan that accounts for unforeseen delays, so you don't extend your timeline beyond the ideal selling window. Also, when purchasing a property that needs improvement, research different renovation strategies to avoid overspending and blowing your budget.

Sudden Rise of Interest Rates

Budget for your loan repayments when rehabbing a property to avoid getting blind-sided by rising interest rates. It’s common for investors to take loans to complete real estate projects, but sometimes property owners get hung up on the construction costs while their loans silently accumulate interests that make it impossible to break even. Imagine you’ve put in all the work to subvert unexpected repairs and cost overruns, only for an increase in interest rates to make your financing more expensive. To avoid reducing your potential returns, some financial experts recommend opting for fixed-interest rates which are less subject to market changes.

Inaccurate After-Repair Value

Work with the most current market figures to get a better picture of your property's after-repair value. It can be challenging to estimate how much your property would be worth after an extensive rehab project, but overestimations can easily make you exceed your budget only to face disappointment when the house hits the market. If you want to get more accurate figures, conduct a property analysis of recent sales that match your project's after-repair condition. It might be hard to find a one-to-one match, so for the best results use two to three properties for a better scope.

Conclusion

Get the most out of your real estate projects by understanding what they entail and what it takes to complete them. First-time investors and property owners often use fixer-upper and property rehabbing interchangeably, but they couldn't be more unlike. For instance, with the former, you don't need to hire a licensed contractor or have any expertise in construction. Fixer-uppers only require cosmetic changes like minor painting, plumbing, or hardware replacement. As a result, you all need some DIY skills, your materials, and a couple of YouTube tutorials to get the job done.

On the other hand, rehabbing a property is a more complex job that requires input from experts with special skills in construction and system upgrades. Thus, rehabbing a property comes with more risks. Plan against unforeseen scenarios like market fluctuations that reduce your selling price, or sudden interest rate hikes that can increase your borrowing costs. However, with the right plan and accurate estimates, you can increase your chances of a successful and profitable rehab project.