A report from Clever Real Estate found that 57% of Gen Z respondents would be willing to put in an offer on a fixer-upper home. The report also revealed that 56% would purchase a home with asbestos, while 54% would buy a property without central air conditioning or heating. With higher mortgage rates, expensive housing prices and inventory issues, many potential homeowners are looking for alternative options to enter the real estate market. However, this desperation to enter the housing market could be a poor choice from a long-term financial perspective , and you may want to avoid certain types of houses.
“In our current economic climate, avoiding properties that could strain your finances or jeopardize your long-term financial plan is crucial,” said Taylor Kovar, CFP and CEO at 11 Financial . “For example, homes requiring major repairs might be a good fit if you’re handy, but they can become an expensive, never-ending project if you’re outsourcing all the work.”
A report from StorageCafe found that the median cost of a fixer-upper home was about $283,000 and that fixer-uppers cost about 50% less than regular homes in 20 out of the 50 largest cities. This is much lower than the median selling price of a regular house, which is currently at $412,300 as of the second quarter of 2024, per Federal Reserve data. It’s understandable why someone would want to purchase this type of property, but there are significant costs that you can’t ignore. The report from Clever also shared that of the 40% of Gen Z homeowners who purchased a fixer-upper home, 27% regretted it.
According to the 2024 U.S. Houzz & Home Study , 51% of homeowners who made renovations in 2023 spent $25,000 or more. Based on data from HomeGuide, you could spend anywhere from $100,000 to $200,000 to gut and remodel an entire house. If you had to remove asbestos from a property, you would spend an average of $2,211 for the project.
Depending on the property’s condition, a fixer-upper home could be an expensive project that may not be worth it. If you’re considering a long-term financial investment, you want to ensure you know what you’re signing up for. You may be better off waiting to save up a larger down payment to afford a more desirable property and not be stuck with expensive repairs for the next few years.
“Properties in areas with high vacancy rates might seem like a bargain, but if the neighborhood is undergoing gentrification, you could face issues with convenience and safety that could impact the property’s long-term value and resale potential,” Kovar said.
As tempting as it may be to purchase a home in a developing community, there may be better long-term moves because there are no guarantees that the developments and changes will occur in the next few years. You could be stuck holding on to this property that isn’t appreciating in value for many more years than you had originally anticipated.
A Home for Your Current Situation
“I always advise people to choose homes that align with their long-term financial and personal plans,” Kovar said. “If someone prefers frequent changes of scenery, a home purchase may not be the best fit, even if it appears to be a great deal.”
It’s estimated that you could spend anywhere from 3%-5% of the loan size on closing costs. Since real estate closing costs are very expensive, you should think twice about the type of home you purchase because the transaction costs could eat into your budget and savings.
Kovar added, “Remember, a home should not only meet your current needs but also be a sound investment for the future.”
A Property for Short-Term Rentals
“Properties intended for short-term rentals, like Airbnb, can also be risky investments,” Kovar said. “While they might offer high short-term returns, they can face fluctuating demand, increased management costs, and huge potential regulatory challenges that could impact their long-term profitability and stability.”
One popular example worth pointing out is the situation in New York City, where a near-ban on Airbnb led to 80% of the listings being removed from the platform. If you had purchased a property for the sole purpose of profiting from short-term rentals, you would have been stuck scrambling to fill a vacant property.
Airbnb also recently forecasted that third-quarter revenue would be below estimates, citing economic uncertainty impacting people’s travel spending. The reality is that many variables are out of your control regarding the short-term rental market.
A few of the issues impacting the long-term value of a short-term rental property are:
Your jurisdiction may ban short-term rentals. Many communities and property management companies have outright banned short-term rentals, and this would leave you stuck with the unit.
Demand could be seasonal. While some units may perform well during the busy travel season, finding guests during the off-peak season could be difficult.
The supply could cause pricing issues. As short-term rentals become more popular in some communities, competition is dropping prices and vacancies.
Before you allocate a considerable portion of your savings to a piece of property, it’s crucial that you perform your due diligence to ensure that this is a viable long-term investment so that you don’t create financial issues for yourself.
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