One question many real estate rental investors often face is “should I buy a gutted house?” “Is a gutted house a good investment?” The short answer is “Yes, buy that gutted house!” However, buying a gutted house does require a bit of research. The good news is that Mashvisor has the real estate investment tools you need to determine if the house will have a good rate of return as a rental property.
What Exactly Is a Gutted House?
Before we go too far, let’s define what a gutted house really is. A run-down house is one that is in need of major repairs and renovations. A gutted house is a bit different. The word “gutted” means that the major demolition has already occurred. Someone, typically a previous owner, hoping to do a renovation did a full demolition on the property and then stopped.
One “guts” a property to strip away all of the wallpaper, flooring, fixtures, kitchen appliances, and in many cases, even the walls. “Down to the studs” is the common term for a fully-gutted house. The term comes from the look when the gut is complete. One can literally see the inner structure or framing studs of the property.
Related: Home Renovations: A Guide for Fixer-Upper Homes
Upsides of Buying a Gutted House
There are many upsides to acquiring a gutted house. For one, it is hard to find contractors for any project. Your gutted house is halfway to a full refurbishment. If the debris has been removed, you even skipped the dumpster and the accompanying mess that goes with that stage of a rehab.
Even better, your general contractor, plumber, and electrician can now look inside the walls and tell you what you’re in for in terms of needed code upgrades. There are fewer surprises in a gutted house because you can literally see through the walls. This is a very helpful view when you and your contractors estimate the cost to finish the project.
Downsides of Buying a Gutted House
As a real estate investor, information is a tool you must employ and you must take caution when buying a gutted house. It would be very helpful to know why the house was gutted and when the project was abandoned. Perhaps the prior owner stopped for financial reasons or passed away. It is worth trying to find out what spooked the prior owner away from the gutted house if those are not the simple answers.
Also, buying a gutted house is no different than buying a new home, or one that is fully updated already. You still need to conduct all of your due diligence and determine if the property is worth investing in. Your contractor can help you determine what it will cost to finish the gutted house. And you will need to decide if the house has potential as a rental property.
Related: Renovating a Rental Property: How to Save Money
Financial Analysis of a Gutted House
If you are planning to fix up and rent out a gutted house, you begin by assigning a cost to the home as a finished property. Just the rewiring and replumbing of a gutted house can be tens of thousands of dollars. A full rehab could even approach six figures depending on the square footage.
Once you know the total cost to acquire and finish the home, it is necessary to perform the same neighborhood analysis and rental market analysis you would for any rental property under consideration. Begin with rental comps in the area to get an accurate monthly cash flow number to use as a baseline for your analysis.
Next, use real estate investment software like that found at Mashvisor to do a cash on cash return analysis and a return on investment analysis. Don’t be worried if you are not familiar with these tools. They are more or less just what you might expect to do on your own to figure out if a gutted house will bring you profits. However, Mashvisors tools save you time. For instance, its Airbnb calculator can help you make your computations to see if a gutted property is worth investing in and renting out as a short-term rental.
Don’t Ignore the Timeline
Since the gutted house is already partially under construction, it may be easy to underestimate the time needed to turn it into a rentable property. A gutted house will not escape the notice of the local building inspectors. The work is too extensive to do with handyman and helpers. A gutted house will need to be rebuilt by the book by experienced, and licensed contractors.
Don’t Ignore the Inspections
Just finding the contractors can take weeks. Then, once you have found your general contractor, you are at the mercy of his or her schedule. More weeks may pass before the work can start. Once underway, a gutted house becomes the same project as any full rehabilitation. You will need up to a dozen inspections on everything from framing to insulation to plumbing and electrical. Be sure you begin with ensuring the square footage you are buying is all legally allowable. Unpermitted expansions may need to be removed. Tick tock.
Renting Out a Formerly Gutted House
Step back and ask yourself what ideal tenant you wish to do business with. Your gutted house will be almost completely new once it is rebuilt. Is that a property you want to rent to just any tenant? Legally your hands are tied in many tenant screening respects. However, you can still exclude pets and smokers (sort of) in most parts of the United States.
Is Now a Good Time to Add a Gutted House to Your Holdings?
Will the gutted house in a neighborhood attract affluent tenants or those who struggle to pay rent? A fully-rehabilitated gutted house is a polished gem. Is your community’s political base supporting eviction freezes? What about rent freezes, or even rent cancellation? What guarantee will you have that you can legally collect rent on the newly updated home you are about to pour time, money, and resources into? Unlike a finished condo or multifamily, a gutted house comes with a lot of forethought. Expect your bank to ask for rent roll projections and possibly some hard questions on rent guarantees if you will be using financing to acquire and rehab a gutted house.
A gutted home presents an investor with a unique opportunity. However, you will still need to do your due diligence. Let Mashvisor help with that step. We have all the tools you need to get a full financial picture of this possible investment.