Is buying a "fixer upper" in a high COL area really a bargain?

[Adam Zapple]

My friend and I talk about this all the time.  We live in an expensive real estate market and both bought fixer's.  We are both very handy and do all the renovations ourselves.  In our bitching sessions, we always say how stupid we were for buying these houses. 

I spend every free minute of my life working on my house.  I dump thousands of dollars every month into the stupid thing.  I often think back on how naïve I was to think "oh yea, I can just fix that."  It is a constant drain on my free time and my wallet.  I'm starting to wonder if it is better to buy something that is already renovated, borrow a little extra, and pay it down by working a few extra shifts.  I think this may be true in high COL areas where there are multiple buyers for even the most run down house.

[paddedhat]

I totally agree. I'm a retired builder who is struggling with the same problem. Fortunately, we are in the prepurchase stage at the moment. We are looking in an area that's been on fire for the last two years, and the kind of homes we want are selling in days. We just got back from a showing of what could be a fantastic mid-century ranch, on a lot that's flat, and three times the size of most in the region. The problem?  Well, it's a time capsule. It was built in 1961, and well maintained since then. However, it still has every original feature, most of which need replacement. The outside needs the sidewalks, driveway, all windows and doors, gable end siding, soffit, facia and gutters replaced. The roof is due in 5-7 years.  The inside is all hardwood floors, that need refinishing, and the kitchen and baths are original, ugly and worn out. Even then, it has some layout issues on the main floor that are unresolvable without stripping the place back to a shell. Most buyers in this market expect to see a finished basement, which it doesn't have at the moment.

It's priced at 80% of what it would sell for if it was totally flipped, and I fully expect that it will under contract by the end of the coming week.  That 20% difference would be my cost, with hundreds of hours of ass busting (uncompensated) work, over a few years, a small amount of subcontracted work, and the material invoices. Bottom line is that, a few years from now, I would have an awesome house. I will have invested hundreds of hours of labor that I will never recover, and the place would be a great bargain for the next guy.  That just doesn't add up, by my calculations.

[ender]

It sounds like you don't enjoy this sort of work.  Your language certainly isn't positive about it. So no, it's not a bargain for you.

A lot of people like this sort of work and are energized/refreshed/enjoy it. For them, assuming the cost breaks about even, it might be endless hours of entertainment and enjoyment.

You don't seem to fall into this category. But you can't generalize "is a fixer upper a bargain?" into a simple yes/no answer because it depends 100% on the buyer's skills, interests, and overall lifestyle.

[backyardfeast]

We're about to take on something similar.  After spending a year looking for what we wanted, and after a crazy summer market (multiple offers within hours of the home coming on the market, sale prices $10-30K over asking), we found a dud with good bones.  It is a 1970s house that was renovated about 15 years ago, but with a really weird floorplan and left as a plain stucco box.  Houses in the neighbourhood that were move-in ready but in need of minor cosmetic updating were selling for around$730K; this one started on the market at $650.  We got it for around $550, hope to gut and reconfigure the layout, putting about $100K in. And though there will still be lots to do in terms of landscaping, etc, we should gain that "extra" $100,000 in equity pretty quickly.

But we have the cash to do the work up front; DH is a builder who can save us $ by doing strategic pieces of the work, and the bones are good: roof, HVAC, electric, plumbing, hot water heater, etc are all recent.  I think we got lucky that way.

(well, actually we didn't get lucky.  DH was NOT going to take on a massive rehabilitation of a really old house.  This one is the best of all possible options, really.) 

[FINate]

My bet: Once you tally the cost of materials on a fixer, the increase in value largely reflects the value of labor plus some extra for incidentals (fees/permits) and some risk premium (never know what problems will be uncovered as you open things up). Basically, it's another version of "there's no free lunch."

That doesn't mean it's not worthwhile. There's a tax advantage to doing your own work since there's no income or payroll taxes on labor you do yourself. And in California, as a result of Prop 13, property taxes are not reassessed if the square footage/footprint of the house remains unchanged. So it's possible to buy a fixer for a discount and remodel to something you like while keeping the old tax basis going forward. Finally, you get to redo the house as you want rather than whatever style the pervious owners liked.

[englishteacheralex]

We have three friends who all bought fixer uppers relatively cheap (450k-550k) during the 2009 housing crash on Oahu. They did all the renovations themselves and now are living in million dollar homes. We love going to their houses for parties! And we think they're awesome bad asses for doing all that work.

But we do not have that kind of skill, tenacity, or energy. We missed out on that amazing window to buy bargain property in Hawaii; my husband and I didn't even know each other at the time and we were both pretty poor at that point, anyway. When we bought our place in 2015 even a fixer upper in Honolulu was 600k-700k; we're talking tear downs at that price. But even if we could afford to buy a place for 700k and then do the renovations, we still wouldn't have done it.

We saw what they went through. Years of blood, sweat and tears every weekend. None of them had kids at the time. Now we all do.

When we had the money to buy a place, we looked for something un-fancy that we could move into immediately and not have to do a single renovation. Found a condo built in 1972 that fit that description. We are such wusses about renovations that even painting the walls felt like an annoying chore. We will happily live with the ugly but perfectly serviceable tile floors and cement block walls for years to come. The place is shipshape, just not HGTV-worthy.

[backyardfeast]

^ That exactly describes what we see around here.  In the really expensive cities (Vancouver/Victoria), the only way to get a bargain in a single-family house is basically in a tear-down.  In our search we saw lots of places in our price range ($650) that would have been bargains if you had a budget of $1million! :)  Then you would have been able to afford to do the work, and you'd have a million dollar house at the end of it. 

Interestingly, though, in condos in those cities, it's clear that finding an older, solidly constructed building is the way to go, if you can either handle outdated decor or doing simpler cosmetic updates (new appliances, maybe countertops, flooring in square rooms, paint).  You get more square footage, better locations, and way cheaper prices.  As long as the building is solid and well-managed, you don't have to worry about the roof, electrical, etc that you do in a house.  Many wins, especially as in expensive markets, the square footage in new buildings is often tiny.

[obstinate]

My sense is that you normally come out ahead on paper if you buy a fixer upper, especially in a high COL location. If you pay someone else to fix it up for you, then you come out less ahead, but still ahead. If you buy something move-in ready, you're basically paying for the difference in hassle that comes with not having to deal with contractors. There are other advantages -- you can often get things exactly how you want them if the place is a fixer upper.

That said, working with contractors can often suck. A lot of these folks are not very good at estimating how long a job will take, and many of them are terrible at organization, scheduling, and listening. To a person, everyone I've ever talked to who moved into a fixer upper has a horror story about one of their contractors. One friend had a contractor who mis-measured one corner of the foundation by half a foot, which required tearing the whole slab up and doing it again. Others have reported incorrect fixture types or positioning. I'd be much more willing to take something like this on if I knew of a very good, organized general contractor by word of mouth recommendation.

[daurelia]

A little over a year ago, I bought a historic brownstone in a nice downtown neighborhood for $260k. If it was in better condition, it could have easily sold for $310-330k. The structure of it was fine, but there were so, so so many shabby ugly old things and it lacked some more modern features.... for example, the thermostat was one of those knob mercury things. we spent about $300 installing a thermostat with wifi and a smartphone app, and have since cut the utility bill nearly in half since we program it to only run when we need it.

We are not handy AT ALL and hired a contractor to do a variety of things-- new kitchen tile and replace a few appliances, completely renovate a bathroom, and many other small things like the thermostat example. We spent about 25k on getting the house in better shape and now it looks great. If we'd done some stuff ourselves I bet we could have only spent 10-15k. Over the next few years we'll have a couple more big expenses for the house so we set aside $400/month into a sinking fund for that.

So in our case, I'd say we come out slightly ahead, but probably broke even. For us it allowed us the opportunity to buy a dream house that we'd otherwise struggle to afford, and then we got to adapt it more to our tastes and needs. We plan to live in this house for 10-20 years, so for us, I think it was worth it. I hope when we sell it eventually the updates will pay off (and not be totally outdated by then!!)

[index]

You may break even if you do a lot of the work yourself, but you will not be compensated for the hours you put in. A contractor who flips homes for a living is:

a. They are getting a better deal than you on the house. They can pay cash and/or are buying homes w/o a realtor (many times they hold a license). In addition they often buy homes out of estates by watching probate court filings so the homes never go on the market.

b. Their sub contractors give them better rates than they give home owners.

c. They can source building materials for 60-70% of the retail price through bulk discounts, supply house relationships, and supplier promotions.

d. They know what to spend money on and what will not give them a return. Most buyers don't know the difference between a $60 dollar light and r-13 batting in the walls vs a $200 light and spray foam insulation.

d. They sell the house when they are done renovating. Everything is brand new and fetches top dollar. A kitchen renovation is great, but trends will have changed 10 years down the line. Buyers will have their heart set on stainless counter tops or whatever is dominating the home shows and your granite or marble will be so 2010's.

This is not to say there are not advantages to buying a fixer upper and doing your own work. You will learn a lot, your house will be finished exactly the way you want it, and you have a pride of ownership gained by doing the work yourself. I believe you will essentially break even at the end of the day and may end up paying yourself $5 an hour for all the work you did. If it is your hobby or you could only afford an area buy buying a house that needs work, more power to you. I wouldn't fool yourself into thinking it is an investment though.   

[englishteacheralex]

You may break even if you do a lot of the work yourself, but you will not be compensated for the hours you put in. A contractor who flips homes for a living is:

a. They are getting a better deal than you on the house. They can pay cash and/or are buying homes w/o a realtor (many times they hold a license). In addition they often buy homes out of estates by watching probate court filings so the homes never go on the market.

b. Their sub contractors give them better rates than they give home owners.

c. They can source building materials for 60-70% of the retail price through bulk discounts, supply house relationships, and supplier promotions.

d. They know what to spend money on and what will not give them a return. Most buyers don't know the difference between a $60 dollar light and r-13 batting in the walls vs a $200 light and spray foam insulation.

d. They sell the house when they are done renovating. Everything is brand new and fetches top dollar. A kitchen renovation is great, but trends will have changed 10 years down the line. Buyers will have their heart set on stainless counter tops or whatever is dominating the home shows and your granite or marble will be so 2010's.

This is not to say there are not advantages to buying a fixer upper and doing your own work. You will learn a lot, your house will be finished exactly the way you want it, and you have a pride of ownership gained by doing the work yourself. I believe you will essentially break even at the end of the day and may end up paying yourself $5 an hour for all the work you did. If it is your hobby or you could only afford an area buy buying a house that needs work, more power to you. I wouldn't fool yourself into thinking it is an investment though.

Yeah, this is totally the conclusion I've come to after doing some research. I read a couple of books about home flipping; got interested in it because of our three sets of friends who lucked out so much in the real estate market here on Oahu (but also put a ton of sweat equity into their homes) and concluded that to really flip homes professionally as a viable career takes a ton of work and a lot of knowledge. I'm happy for my friends, but I think they mostly just lucked out (bought at a great time)--i.e. their success would be hard to replicate.

Acquiring long term rentals seems a bit more viable/less risky/less backbreaking to me, although doing that well seems to take quite a bit of sweat equity and know-how, too.

[Kaplin261]

My old home was a fixer upper. I spent a lot of money and time maintaining that home and when we sold it we lost money because the whole neighborhood was older and not a lot of people were maintaining their homes like we were.

We ended up buying a home that is only 5 years old. I love having free time on the weekends and not seeing all the home depot charges on my credit card at the end of the month. We were patient and found someone who was desperate to sell and had a bad realtor so the price we got this home for was $20,000 under market value plus future appreciation looks good.

[Chris22]

We estimate we're going to be right around break even.  We paid $335k for a 1959 house, and have since dumped about $35k into it doing a full basement gut and redo, added a 3/4 bath, replaced all plumbing, refinished all HW floors (inc. ripping up carpet to expose/refinish HW on the top floor), new appliances, painted every room, all new HVAC, new landscaping, etc.  The kitchen (appliances aside) and master bath were already in good shape, everything else needed something.  Houses our model in great condition on our street generally sell for $365-380k.  We went with higher end finishes and features, so if we were to get the top of that range, we'd theoretically make $10k on our labor and time of living in a construction zone for 18 months. 

OTOH, we're not selling, we paid cash for all of the renovations so we aren't paying mortgage interest on a higher sales price, nor are most of our renovations the type to affect property tax valuations (even the bath is in the basement so not likely to count much).  And we got exactly what we wanted, and the piece of mind that every major system in the house is brand new and unlikely to give us significant problems in the next few years.  Basically, all the big spending should be over for a while. 

[Stachetastic]

we are on our third fixer upper, and have found it's not always as cut-and-dried as we'd like to think when it's all said and done. One thing we love about it is having equity very quickly, even in a down market. One thing we hate is that we ALWAYS underestimate our time and motivation to get things done.

An example: our current home was the dog of the block, and 1957 time capsule. The good news is that there weren't any crappy renos to undo, everything was original. We've been here 2 years and still have one bathroom and the kitchen to gut. We also need to refinish the hardwood floors and do some ceiling repair where cracks and leaks have occurred through the years. The good news is a house three doors down is currently on the market for $425k. We paid $70k. Our house is much smaller and a bit older, but still. No way we could have afforded this neighborhood had we bought something updated and ready to go.

[clarkfan1979]

I have bought two "fixers". There was a large investment of time for the first 6 months for the repairs. However, after that we enjoyed living in house with very little problems. If you buy a house that is "move in ready" I see there being more problems because everything was looked at or fixed during the first 6 months. Just my opinion.

[former player]

If you are buying in an expensive area most of the value is in the plot.  Buying a fixer-upper might get you a bit of a discount on the plot value or it might not - you need to work hard on spotting available opportunities that others haven't, and then negotiate hard.  A bargain is unlikely to fall into your lap, you have to work for it.

The other major factor I think is to what extent you are prepared to live in "less than show-home perfect".  Paint and floorcoverings and minor breakages are temporary issues, easy to live with and cheap to resolve, whereas structural and safety issues are permanent and expensive.   If you demand perfection, either by buying it or doing it up to that standard, it will cost one way or the other.  If you can live with less than perfection in return for location/space/underlying quality of house you will live there more cheaply.

Disclaimer: I have a history of buying outdated houses in expensive areas and living with them like that for years and then doing them up over a decade or so.  I couldn't now afford to buy the house I live in.

[Adam Zapple]

I have bought two "fixers". There was a large investment of time for the first 6 months for the repairs. However, after that we enjoyed living in house with very little problems. If you buy a house that is "move in ready" I see there being more problems because everything was looked at or fixed during the first 6 months. Just my opinion.

This is a smart way to do it.  If I could go back, I would bite the bullet and do everything upfront.  Even if that meant subbing out some of the renovations and even borrowing a little extra, then picking up some extra side work/overtime to pay it down.  I actually enjoy doing carpentry and am very good at it.  I just have less time than I used to and think I was a little naïve in thinking I would have the available time and money to do everything myself.  My guess is that I will recuperate all material costs I've put into the home but will be paid little or nothing for the thousands of hours I have put into the renovations. 

The positive thing is that I've learned a lot from the experience, and now know what I want out of a home if we decide to sell and buy something else in the future. 

[tooqk4u22]

We have three friends who all bought fixer uppers relatively cheap (450k-550k) during the 2009 housing crash on Oahu. They did all the renovations themselves and now are living in million dollar homes. We love going to their houses for parties! And we think they're awesome bad asses for doing all that work.

Buying at the bottom of the market and making some improvements and then ending up with a $1mil house is not exactly the right comparison because all the "fixers" would have increased in base cost as well....but generally this is exactly when you want to buy. 

You may break even if you do a lot of the work yourself, but you will not be compensated for the hours you put in. A contractor who flips homes for a living is:

a. They are getting a better deal than you on the house. They can pay cash and/or are buying homes w/o a realtor (many times they hold a license). In addition they often buy homes out of estates by watching probate court filings so the homes never go on the market.

b. Their sub contractors give them better rates than they give home owners.

c. They can source building materials for 60-70% of the retail price through bulk discounts, supply house relationships, and supplier promotions.

d. They know what to spend money on and what will not give them a return. Most buyers don't know the difference between a $60 dollar light and r-13 batting in the walls vs a $200 light and spray foam insulation.

d. They sell the house when they are done renovating. Everything is brand new and fetches top dollar. A kitchen renovation is great, but trends will have changed 10 years down the line. Buyers will have their heart set on stainless counter tops or whatever is dominating the home shows and your granite or marble will be so 2010's.

This is not to say there are not advantages to buying a fixer upper and doing your own work. You will learn a lot, your house will be finished exactly the way you want it, and you have a pride of ownership gained by doing the work yourself. I believe you will essentially break even at the end of the day and may end up paying yourself $5 an hour for all the work you did. If it is your hobby or you could only afford an area buy buying a house that needs work, more power to you. I wouldn't fool yourself into thinking it is an investment though.   

This is about right, but I would add that they approach it from the numbers, as opposed to emotionally, with said numbers including all of the above plus an expected profit...and if the numbers don't pencil out based on current sales data for similarly renovated properties (ie limited to no market appreciation) then they don't do it.

As for the general aspect of buying a "fixer" I find that most people overpay for the "good bones" but then end up putting in 10-30% more than the as-renovated value.  When they come out even to slightly ahead, it is usually because the house was so horrific that a lot of people couldn't see through. 

The moral of the story if you are looking at what you think of as a "fixer" that you can live in and fix up over time then you are almost certainly overpaying for it and will have more invested in it than you expect....better to buy the house that costs more but is already fully done the way you want or buy the gut rehab that isn't really livable and do everything upfront.

[Chris22]

The moral of the story if you are looking at what you think of as a "fixer" that you can live in and fix up over time then you are almost certainly overpaying for it and will have more invested in it than you expect....better to buy the house that costs more but is already fully done the way you want or buy the gut rehab that isn't really livable and do everything upfront.

There's another option, which is what we went with; we bought a house that was "half updated" where the kitchen and master bath had been done, but had some other seriously old or outdated parts (mechanicals, wood-paneled basement).  We were able to quickly update/restore parts of the house (mechanicals, cosmetics on the top floors) and take our time with the other parts.  We were able to live on the top two floors and redo the basement at our leisure.  As mentioned above, I think I'm in the black ~$10k or so purely on the price paid vs. house value, and I'm more ahead if you consider what I'd be paying in additional taxes, mortgage interest, etc, on a house that cost (my house price + my renovations price). 

[dess1313]

It can be worth it and it may not be

I got a condo in 2009 that was a ugly duckling of a place.  good bones. horrible choices of what was done to it.  At first i was happy it was my first house and i figured i'd just do cosmetic stuff.  Then once i lived there for a while, the cosmetic stuff turned into some pretty big hard core reno's.

Would i do a full house reno again?  probably not
Would i do more cosmetic reno again?  probably.  especially now i have a way better understanding of what a true 'cosmetic only' reno is.  I didn't anticipate the amounts of work i would have to do for some of the bigger projects in here

[tooqk4u22]

The moral of the story if you are looking at what you think of as a "fixer" that you can live in and fix up over time then you are almost certainly overpaying for it and will have more invested in it than you expect....better to buy the house that costs more but is already fully done the way you want or buy the gut rehab that isn't really livable and do everything upfront.

There's another option, which is what we went with; we bought a house that was "half updated" where the kitchen and master bath had been done, but had some other seriously old or outdated parts (mechanicals, wood-paneled basement).  We were able to quickly update/restore parts of the house (mechanicals, cosmetics on the top floors) and take our time with the other parts.  We were able to live on the top two floors and redo the basement at our leisure. As mentioned above, I think I'm in the black ~$10k or so purely on the price paid vs. house value, and I'm more ahead if you consider what I'd be paying in additional taxes, mortgage interest, etc, on a house that cost (my house price + my renovations price).

.

To be accurate you would need to compare it to the rest of your area's appreciation....ie if your house and all other houses went up 10% then your $10k gain is not because of the renovations...to get the accurate picture you need to net out the imbedded market appreciation over the comparable time period. 

[FiftyIsTheNewTwenty]

You make your money on the buy, as is often said.  The cheap stuff often sells for more than it should, based on the real cost of renovations, with plenty of naive, would-be DIYers chasing it.

[SwordGuy]

I buy houses for less than half price and fix them up.  When they are fixed up the total cost is about 60% of the after repair value.

That includes labor on my part.    Might be 3 months of weekends or it might be 7 months of weekends.     Hard work and it does wear us down a bit.

But it also feels good to have that sense of accomplishment.

My current employer won't pay me for that time if I work extra - so I generally don't work extra.

I could go do freelance work in my field but, frankly, I get enough of my regular work at work.   I want to do something different with my free time. 

Our first rental netted us about $140 an hour, based on the increase in property value over total cost of purchase and repair and the number of hours we put into it.

2nd rental required a lot more work.   My numbers are a bit less sure on this one.  We definitely made $50 an hour for our repair work and possibly higher.

That's good money.

But I'm not buying a house at retail minus 10%.

I'm buying a house at 41% to 50% of retail.   That makes all the difference.

But regardless of the hourly rate, it's still money that stays in your pocket instead of going to someone else's.

And let's face it, $100,000 money you keep in the stock market compounding at 7% after inflation is still over half a million dollars in your pocket in 25 years.  And an income at the 4% SWR of $20,000 a year. 

In 25 years that $5 an hour will seem like a big deal. :)

[Chris22]

The moral of the story if you are looking at what you think of as a "fixer" that you can live in and fix up over time then you are almost certainly overpaying for it and will have more invested in it than you expect....better to buy the house that costs more but is already fully done the way you want or buy the gut rehab that isn't really livable and do everything upfront.

There's another option, which is what we went with; we bought a house that was "half updated" where the kitchen and master bath had been done, but had some other seriously old or outdated parts (mechanicals, wood-paneled basement).  We were able to quickly update/restore parts of the house (mechanicals, cosmetics on the top floors) and take our time with the other parts.  We were able to live on the top two floors and redo the basement at our leisure. As mentioned above, I think I'm in the black ~$10k or so purely on the price paid vs. house value, and I'm more ahead if you consider what I'd be paying in additional taxes, mortgage interest, etc, on a house that cost (my house price + my renovations price).

.

To be accurate you would need to compare it to the rest of your area's appreciation....ie if your house and all other houses went up 10% then your $10k gain is not because of the renovations...to get the accurate picture you need to net out the imbedded market appreciation over the comparable time period.

Time period is less than 18 months, market hasn't moved 10% in that time.  Maybe a couple points. 

[englishteacheralex]

I buy houses for less than half price and fix them up.  When they are fixed up the total cost is about 60% of the after repair value.

That includes labor on my part.    Might be 3 months of weekends or it might be 7 months of weekends.     Hard work and it does wear us down a bit.

But it also feels good to have that sense of accomplishment.

My current employer won't pay me for that time if I work extra - so I generally don't work extra.

I could go do freelance work in my field but, frankly, I get enough of my regular work at work.   I want to do something different with my free time. 

Our first rental netted us about $140 an hour, based on the increase in property value over total cost of purchase and repair and the number of hours we put into it.

2nd rental required a lot more work.   My numbers are a bit less sure on this one.  We definitely made $50 an hour for our repair work and possibly higher.

That's good money.

But I'm not buying a house at retail minus 10%.

I'm buying a house at 41% to 50% of retail.   That makes all the difference.

But regardless of the hourly rate, it's still money that stays in your pocket instead of going to someone else's.

And let's face it, $100,000 money you keep in the stock market compounding at 7% after inflation is still over half a million dollars in your pocket in 25 years.  And an income at the 4% SWR of $20,000 a year. 

In 25 years that $5 an hour will seem like a big deal. :)

Yeah, when I read real estate books this is the kind of stuff they recommend if you want to actually make money on rentals/flips. Hard work and really good bargains on the buy. Reading books instead of watching HGTV made me realize that it's not just some easy money scheme to buy a fixer upper and then flip it. Seems to take a lot of work, experience, and savvy. As well as a little luck.

[Adam Zapple]

I buy houses for less than half price and fix them up.  When they are fixed up the total cost is about 60% of the after repair value.

That includes labor on my part.    Might be 3 months of weekends or it might be 7 months of weekends.     Hard work and it does wear us down a bit.

But it also feels good to have that sense of accomplishment.

My current employer won't pay me for that time if I work extra - so I generally don't work extra.

I could go do freelance work in my field but, frankly, I get enough of my regular work at work.   I want to do something different with my free time. 

Our first rental netted us about $140 an hour, based on the increase in property value over total cost of purchase and repair and the number of hours we put into it.

2nd rental required a lot more work.   My numbers are a bit less sure on this one.  We definitely made $50 an hour for our repair work and possibly higher.

That's good money.

But I'm not buying a house at retail minus 10%.

I'm buying a house at 41% to 50% of retail.   That makes all the difference.

But regardless of the hourly rate, it's still money that stays in your pocket instead of going to someone else's.

And let's face it, $100,000 money you keep in the stock market compounding at 7% after inflation is still over half a million dollars in your pocket in 25 years.  And an income at the 4% SWR of $20,000 a year. 

In 25 years that $5 an hour will seem like a big deal. :)

Are you in a high cost of living area?  Is there a strategy you would like to share with us?  I can't fathom finding a deal like that in my area.  When you say you are buying at 41% of the retail, are you talking about after repair value or before repair value?

[DangleStash]

My bet: Once you tally the cost of materials on a fixer, the increase in value largely reflects the value of labor plus some extra for incidentals (fees/permits) and some risk premium (never know what problems will be uncovered as you open things up). Basically, it's another version of "there's no free lunch."

That doesn't mean it's not worthwhile. There's a tax advantage to doing your own work since there's no income or payroll taxes on labor you do yourself. And in California, as a result of Prop 13, property taxes are not reassessed if the square footage/footprint of the house remains unchanged. So it's possible to buy a fixer for a discount and remodel to something you like while keeping the old tax basis going forward. Finally, you get to redo the house as you want rather than whatever style the pervious owners liked.

Another advantage of a fixer is that you can buy a larger house now, and fix it later.  Most of the time, someone WAS living there... it really just comes down to is it livable vs. what you want it to be.  Buying something with good bones and major systems/layout up to par, you can go a long time with something as simple as fresh paint and new carpet.  Take on projects room by room, and only do things like refinishing the floors before you move in so it's minimally painful.

[Trekker]

In running calculations on the profit potential of a "fixer", the location is really critical. In the SoCal market, you need to separate the lot cost and the house cost in your calculations.

For example, our lot costs are approximately $100/sq ft. If you purchase an $800k fixer in the South Bay of LA, you're really purchasing a lot. The 1300 sq ft home on the lot (whatever the condition) is basically valued at zero.

Many contractors/investors would rather just level the lot and start over so that they end up with a property that they can sell at $1.2M.