Real estate is perhaps the oldest asset class known to humankind, being farmed and used for dwellings since our ancestral days that date modern languages. This asset class is intrinsically tangible and personal, which sets it apart from stocks, bonds, and various alternatives.
Suzanne and I are fans of physical real estate since it holds many investment traits that other assets cannot boast, such as tax deferrals, depreciation, and relatively safer leverage. Furthermore, real estate can be rewarding for those willing to get their hands dirty and make improvements themselves.
Today, I want to share my story of navigating a real estate opportunity in an older home I bought several years ago, plus the biggest lessons I learned.
Fixer-Upper
The term fixer-upper is synonymous with ordinary Americans and investors alike, thanks to the abundance of home improvement television shows that air across the various stations. Notable titles include Fixer Upper, Design on a Dime, Love It or List It, and the Property Brothers.
The premise of many of these shows is simple: improving a distressed or old home makes financial sense for your cents, whether for living in or making a profit.
Around six years ago, I decided to purchase a fixer-upper myself since it was the best option given my housing desires: easy access to outdoor recreational activities while also being close to the city center.
I made scant improvements to the home for several years since it was not financially attainable, only fixing things as required. However, my financial situation changed as my life progressed, and my spouse and I embarked on improving our now-shared home.
Opportunities
The opportunities were abound since our home hadn't seen many updates in its sixty-plus-year lifespan, so we weighed what made the most sense.
For those new to remodeling, you will discover early on that your budget will almost always be the constraining factor when evaluating what to improve. And even then, the best return on investment for soon-to-be-sold fixer-uppers usually comes from relatively minor improvements to one's kitchen and bathrooms, plus cosmetic landscaping to improve a home's curb appeal.
When we embarked on this remodeling opportunity, our goal was to modernize the house, make the living spaces more functional, and increase the home's value. Thus, we settled on improving our kitchen and upstairs bathrooms and finishing our basement.
But we soon experienced what many in the industry call scope creep.
Scope Creep
Scope creep refers to unexpected changes made during a project after the planning stage. When these changes occur, they add to the project's scope and increase its turnaround time and cost.
During our remodel, we knew that there was a chance asbestos, a naturally occurring and dangerous mineral when inhaled, would be discovered in the walls. After all, asbestos was a standard construction material ingredient until recently.
However, we decided that once all of our walls came down, replacing all of our plumbing and electrical wiring from the sixties was prudent. These improvements dramatically increased the cost of our remodeling since we went from selective re-wiring and plumbing to including the entirety of the home.
While we are okay with this level of scope creep since we had the financial ability to handle the change in cost, it is a decision others regularly face.
Suppose you are improving a home to sell. In that case, you must meet the local code requirements. But making improvements above and beyond code is a choice only you can make that will come at the expense of decreased profit; for those improving a home to live in, making updates that enhance your home's safety and longevity is something to consider despite the added cost.
Delays
Another facet of real estate opportunities is that while they can generate substantial profits, they regularly are plagued by delays. With our remodel, the construction process took several months longer than anticipated due to the changes in scope and delays from contractors and the city.
During this period, interest rates changed dramatically, and the housing market began to slow down. While we were not affected by this, those improving their homes to sell could experience a meaningful change in the profitability of their project. Therefore, it is crucial to be aware of the macroeconomic environment while also doing everything possible to avoid slowdowns.
For us, avoiding slowdowns meant I often had to make 3-4 unexpected trips over to the construction site during the week while also being ready to find an alternative worker if someone canceled.
Anyone who thinks that remodeling when relying on others is easy is undoubtedly in for an awakening, so be ready to handle emergencies as they arise.
The Results
Once the construction ceased and the remodeling was complete, we moved back into our home. And, while we discovered some quirks that required fixing, most of our remodeling turned out as expected. The result is a home we love!
While real estate is a very hands-on asset, it is personal and craftable to our desires and needs. Great deals are available for those looking to make money or find a bargain if one is willing to put in the work.
At Lundeen Abrams Advisors, we regularly evaluate client portfolios and can help you decide which investments are worth holding and liquidating. Further, we regularly help clients evaluate non-traditional real estate investments that might be worth your consideration!
So, if you are considering redeploying some of your assets into real estate, please get in touch with us and set up a consultation today.
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