My coworker asked me for my honest opinion whether his house is a money pit. It’s actually a less complicated question than it might sound. Any house can become a money pit, but most houses won’t, if we don’t let them. Here’s how to keep house money pit issues under control.
In my experience, homes usually become money pits due to a combination of neglect and taking on too many projects at once. Both of these issues are manageable over the long term.
General principles to keep your house from becoming a money pit
As a landlord, I’ve seen lots of money pits. I can walk into a house with a notebook and estimate the amount of money it will take to bring the house up to code and attract a quality tenant. Sometimes the numbers make sense and sometimes they don’t. Actually more often than not, they don’t. I’ve evaluated well over 100 properties, which is enough to pick up on some patterns.
Most money pits I’ve seen either fell into neglect, or fell victim to a well-meaning DIYer who ended up over his or her (I’ll guess his) head. I’ve walked into houses that I thought were really nice, until I walked into what used to be the bathroom. Imagine walking in and finding all the fixtures missing. The holes for the pipes were still there, if there was still drywall on the walls.
The worst money pit I ever saw had not just a bathroom in that state, but half the kitchen was missing too.
And I have two runners-up to the house with the missing bathroom and half a kitchen. One had a detached garage that wasn’t supposed to be detached. The slab the garage sat on had sunk at a weird angle, and the garage had started separating from the house. Doesn’t that sound like fun?
The other one just suffered from two decades’ worth of neglect. The previous owners lived there for two decades and just never fixed or replaced anything the whole time they lived there. All the big-ticket expenses were due for replacement. It needed an air conditioner and furnace and a roof. But even the things that were still functional were dated and worn out. I’ve seen houses with dated but well-cared-for fixtures that had a ton of retro charm. But this house wasn’t one of them. It was all used up.
Eyes bigger than your wallet
The big problem with real estate is that our eyes are bigger than our wallets. I can walk into any house and find $50,000 worth of work that would be nice to do. Even if it’s a brand new house, I can still find $50,000 worth of nice-to-haves.
I usually watch HGTV twice a year, when I’m at the dentist. He has it on to help you keep your mind off what he’s doing. What I’ve learned from watching HGTV twice a year for most of my adult life is that $50,000 might be conservative. Cable TV hosts can find a lot more than $50,000 worth of work to do. I’m pretty confident some of those guys could spend $500,000 fixing up a $125,000 house. That doesn’t mean it’s a good idea.
There’s a difference between nice-to-haves and need-to-haves. And knowing the difference is how you keep from getting in over your head and turning a nice house into a money pit.
How much you should be spending on your house each year
If you’re spending what you should spend on house upkeep every year, then by definition it can’t be a money pit. And, no matter how new or old a house is, you will spend, on average $1,000 a year just dealing with entropy. Human-made objects break down with the ravages of time, and houses are no exception.
Now, some years you’ll spend $5,000 on an air conditioner. That’s offset by those years when you spent a couple hundred bucks on a minor repair or a simple project. In the end, over the course of owning a house for 30 years, you’ll probably put an average of $1,000 a year into it. Now if you don’t stay in the house for 30 years, depending on where the big-ticket items line up, you could go over that.
If you’re not fixing things when they need to be fixed, your house eventually will become a money pit.
Planning and budgeting for nice-to-haves
But most of us probably go above and beyond that, because $1,000 is the minimum. There’s a rule of thumb you can follow on that too.
The IRS says not to spend more than 1/3 of your pre-tax income on housing. That means if you make $100,000 a year before taxes, you should spend no more than $33,333.33 a year on your house. So that makes planning the nice-to-haves easier.
First and foremost, you take care of any immediate needs. If that causes you to go over budget this year, make it up next year. Next, add up your mortgage payments and those immediate needs. Let’s say your mortgage payment is $2,000 a month. That’s $24,000 a year. Add the $1,000 a year average. If you make $100,000, $33,333 minus $25,000 is $8,333. That means you can spend $8,333 on projects and it’s not a money pit. It can’t be.
Now, that means my hypothetical $50,000 worth of work I can find to do on any house will take six years to make happen, assuming no big-ticket items come due during that timeframe. But six years isn’t never.
When money pits are good
Sometimes, for the right person, a money pit is a good thing. True money pits scare off a lot of potential buyers, and keep the prices low. One of those money pits I looked at would have been a huge bargain. We estimated it needed $20,000 worth of work. But once that work was done, the house was going to be worth $60,000 more than the asking price. The problem was, the work would take six months for me to get done working on it part-time. I didn’t have six months and I wasn’t going to have 20 grand left after making the down payment. It wasn’t the right house for me, but someone else snapped it up quick.
The house with the detached garage that should have been attached sold eventually. The garage looks fine now. If you know who to call to fix that sort of thing, it can turn a house into a bargain. Trust me, once I got inside and saw what was going on with that garage floor, I knew I wasn’t going to be making on offer on the house. I looked at the rest of the house mostly out of morbid curiosity. The garage wasn’t the only thing wrong, just the most obvious.
If you have the skills to fix up a place, buying a money pit for your own home can be a good way to save money.
And of course, those We-Buy-Houses-For-Cash people specialize in money pits. They’re looking for a distressed property to gut and update.