It’s all too common for beginner investors to look at a cheap property in a good neighborhood and see nothing but dollar signs. I’ve even fallen into this trap myself. I once found a cozy little two-bedroom bungalow on the outskirts of town that was way under my budget and thought, “This is the investment of a lifetime.”
However, when it came time to renovate the property, I discovered I’d made a huge mistake. The septic tank was busted and there was black mold under the bathroom flooring. And that was just a small handful of the many things wrong with the property. Suddenly, that little bungalow turned into a giant, bottomless money pit that I’m lucky to have escaped.
I vowed to never let that happen to me again. So, I did some research and learned exactly what to look for in an investment property in the future. I now have five essential tips I follow every time I look at a new property to add to my portfolio. So far, these tips have saved me thousands of dollars on deals that, in hindsight, were just too good to be true.
These tips can save you, too.
Do You Know What to Look for in an Investment Property?
Let’s say you’re scouting a local neighborhood and stumble upon a distressed home. It’s clearly in need of a little TLC—maybe even more than a little. The grass looks like it hasn’t been cut in a year, the windows are boarded shut, and it definitely needs a fresh coat of paint, at the very least. Properties like this can look pretty rough on the outside, to you, but it may seem like a potential goldmine. You see the opportunity to buy cheap, rehab, and rent out or sell for a nice profit.
But, just because a property is cheap doesn’t necessarily mean it’ll make a good investment. For every scorching hot deal you find on an “ugly” house, there are many other properties that are cheap for a reason. Can you spot the difference?
To help you learn what to look for in an investment property, I’ve put together a simple list of qualities the property should have right off the bat. A good investment property is one that is:
|Priced appropriately||The property costs about the same as other properties in the area in similar condition. Yes, that means rock bottom prices are a red flag. If a property has a much lower price point than other places around it, do some digging to find out why. Go ahead and look that gift horse in the mouth.|
|In a good location||If you think of your ideal tenant or buyer, you should be able to picture them living comfortably in this neighborhood. Who will this property attract?|
|In decent condition||The property should only need minor repairs or cosmetic renovations. Bigger repairs are almost always more costly than they look on paper.|
|Owned by a motivated seller||Homeowners who are moving out of state for work or looking to get out from under an expensive mortgage are more willing to negotiate a fair deal so they can close quickly.|
But, there’s more to knowing what to look for in an investment property than just this. You can use these factors as a baseline in your initial search for investment properties to buy, rehab, and sell. When you take a closer look at these houses though, there are a few other important tips you should follow.
Tip #1: Learn How to Spot White Elephants
What’s a white elephant? It’s a house that seems fantastic at first glance but comes with a bunch of hidden expenses or downsides. Some white elephants I’ve seen on the market are:
- Houses that are close to railroad tracks. The noise makes them virtually impossible to rent out for long or sell to an interested buyer.
- Homes near power lines. Many renters and buyers are wary of living so close to power lines and this can significantly reduce a property’s value.
- Properties in bad neighborhoods. High neighborhood crime, underfunded school districts, and city plans to build nearby may turn renters or buyers off, especially families.
These types of problems won’t show up on a repair list. You also can’t renovate your way out of these situations. To protect your bottom line, rule out these white elephants entirely or at least price them accordingly when you figure your potential returns.
Tip #2: Go for the Crowd-Pleasers
You may love sunken living room floors, but does your ideal tenant or buyer like them? If you want to know what to look for in an investment property, ignore your own preferences. Remember that you’re not buying this home for you.
Sure, funky design details and unusual locations help your properties stand out on websites like Zillow, but when push comes to shove, most people just want to live somewhere comfortable and traditional—and close to the local grocery store. A traditional house in a convenient location with a solid value is a much more reliable investment than a house with all sorts of bells and whistles.
Tip #3: Offer Low and Stay Under Budget
Come up with a budget for buying a new investment property, but make an initial offer far below this budget. Being conservative with your offer prevents you from sinking all of your cash into one place and leaves room in the budget to make the property livable and presentable. When it comes to renovations, there are almost always unpleasant surprises waiting for you that need to be fixed, so having the extra cash in your pocket is handy.
One of the biggest mistakes I see beginner investors make is that they’ll shop for properties priced at the limit of their budgets instead of focusing their search on properties far below it. Just because you have the money doesn’t mean you need to spend it all in one place.
Tip #4: Don’t Look at a House Through Rose-tinted Glasses
When I was a beginner investor, I made a rookie mistake: I fell in love with a property before I had the chance to really look at it clearly. Once you decide you like a property, it’s a lot harder to walk away from the deal when the price creeps too high or you find a bunch of repairs you have to make.
If you’re researching or inspecting a property for the first time, set aside all of the positive qualities for now and focus on the negatives. Make a comprehensive list of everything you would need to fix, no matter how small. Even if the repairs are minor, every little square inch of linoleum and extra can of paint adds up.
Tip #5: Take a Tour Around the Neighborhood
Investment properties don’t exist in a vacuum. The location matters just as much as the condition of the property. To know what to look for in an investment property, you need to have an ideal tenant or buyer in mind. Who is looking for homes in this neighborhood?
This is especially important if you plan to rent the house out as some tenants are higher maintenance than others. For example, if the property is located within walking distance to a college, chances are it’s going to attract college students. If you’re not prepared for this market segment, you’re in for a shock. These types of properties are notoriously hard to manage long term because they usually require more repairs and are empty during the summer when students are on break. Investors looking for easy passive income won’t find it here.
You Don’t Have to Make These Decisions AloneEven if you follow all five of these tips perfectly, there’s no guarantee
that your investments will be a success. That’s because it’s hard to accurately assess a property and find every little repair that might need to be made before you can safely rent it out or sell it.
But I have a solution for you—one that has worked wonders for me. When I became an independently owned and operated HomeVestors® franchisee, I got access to ValueChek™, a proprietary platform that shows me exactly what to look for in an investment property. ValueChek™ provides HomeVestors® franchisees with an estimate of the cost of those repairs and factors that contribute to the estimated price you should offer for the property.
All of the math is done for you, including:
- Estimated labor and repair prices for more than 80 different types of renovations
- Repair costs based on square footage
- Comparison prices of similar properties
- The total estimated cost of the property based on these factors
- The ability to share this information with associates
As a HomeVestors® franchisee, you’ll gain a strong support system of investment tools and experts to guide you through this process from beginning to end. Why rely on guesswork? To make better investment decisions, contact HomeVestors today.
Each franchise office is independently owned and operated.
HomeVestors of America® is the nation’s only real estate investing franchise, providing business opportunities to real estate and investment professionals across the nation.