Real estate investing sometimes feels like gambling: you place your bet and hope the numbers work in your favor. Unlike gambling, with real estate investment you can do plenty of research on your “bet” to determine your likelihood of winning big.
There are several factors you can spot before closing to let you know whether your investment may not be worthwhile. Features that affect the price per square foot and resale potential will ultimately impact your bottom line. Here are eight of them to watch out for:
1. Poor layout
A wonky layout is hard to overcome when renting or reselling your investment property. Certain home layouts limit your potential rental or seller pool by placing limitations on the tenants. A house with no master bathroom and/or a shared bathroom may not appeal to families. Conversely, having to walk through the master bedroom to get to the only bathroom in the house is not ideal for anyone with roommates or who wants to host guests. Don’t invest in a layout that limits your resale potential.
How do you make the call on a good floor plan versus a bad one? Walk through the house and ask yourself, “does this feel natural?” If you find yourself at odds with the layout, your future tenants or buyers likely will too.
2. 1/1 or 2/1 houses
Don’t invest in a one-bedroom/one-bathroom house. This seriously limits your resale potential because only individuals or very small families will fit. Few people are looking to buy a home with no room to grow. If the house is located on a decently-sized lot, it may have some resale potential as a tear-down project, but not much else.
Some older markets only have houses that are two-bedroom/one-bath. If that’s all that’s available in a subdivision, your investment is safer. If there are 3/2 houses surround the property, potential buyers would rather wait for one of those homes instead.
The only exception to this rule is in homes with unfinished areas. Do the math and if your rehab budget can support it, buy with the intention of adding another bed, bath or both. You might even be able to lowball a 1/1 or 2/1 seller looking to unload, then flip your investment for a nice profit just by adding the missing bedroom or bathroom.
3. Additions and conversions
If you’re looking at a 1/1 or 2/1 home, you may be tempted to add or convert to improve the amount of livable space. Different than finishing unused space, don’t be tempted to add or convert space to make the home seem more functional. This kind of thinking is a value trap!
Additions don’t improve the price per square foot; nearby homes originally built with an extra bedroom will still perform better. Conversions also don’t improve your resale value. Converting a garage to living space won’t improve the price per square foot: that garage had value, which is now gone.
4. Structural issues
Depending on the land, weather and year of development, some neighborhoods may be more prone to foundational or structural issues than others. A house built on the side of a hill needs much more scrutiny for structural issues than a house on flat land. Consider issues that will need repair like the foundation, bearing walls, beams, floor framing and roof framing. Because you usually can’t see structural issues, always consult a structural engineer before investing in your property.
This doesn’t mean you should never buy a house unless it’s on a flat surface. You need to do your research before investing and be aware of any costs required to improve structural integrity before you close. Make sure your purchase price reflects the upgrades you’ll need to make to the property’s structure, and that you document all updates to prove repairs when it’s time to resell.
5. Undesirable environment
No one wants to live somewhere potentially hazardous, like underneath power lines or a gas pipeline. Similarly, no one wants to live somewhere noisy. If the property backs up to train tracks, a bar or a sports field, buyers will be wary of uncontrollable noise at any given hour.
When searching for an investment property, scope out the area nearby for potential features that could disrupt daily living. If the property you’re evaluating backs up to a liquor store it will not have the same price per square foot as a comparable property.
On the flip side, desirable features will improve the price per square foot. A golf course, water feature or green space are desirable neighborhood amenities.
6. The biggest house on the block
A big house sounds impressive, but in the wrong area it can stick out like a sore thumb. Bigger isn’t always better. The price per square foot decreases as square footage increases, so when you’re looking at comparable homes in the area, be sure to factor that into your calculations. If you are having trouble running the numbers on the potential value of the house, hire an appraiser to help you determine a realistic number.
7. No good comps
If you can’t find a comparable sale in the neighborhood to determine your investment numbers, then buying the property is too risky. You need to have available data on recently sold homes similar in location, size, condition and features to obtain accurate numbers. Appraisers can help you find comps and create useful numbers for your investment. It will be too difficult to determine a realistic projection without comparable sales.
8. Anything that feels wrong
Facts and numbers are critical to investment; you should not buy a house just because you feel good about it. However, if a prospective investment feels bad, it probably is bad! Trust your intuition. If you have to convince yourself of a property’s potential, it isn’t worth buying. Listen to your gut!
Do your own research
Before buying an investment property, always conduct your own research and run your own numbers on a prospect. If you’re unsure or need help, hire experts who can offer unbiased opinions to help make your decision. The purpose of real estate investment is to make a profit, so don’t skimp on your research and risk losing money.