Two types of value in real estate investing – how to tell if something is a good deal
There are two types of value that I consider, the first is the tangible qualities of an asset that are likely to elevate the value of one property above another. Examples of this would be location, lot, and layout.
Location – proximity to schools, employment hubs (think hospitals, mills, ports), the “prestige” or desirability of an area. The location of a property can drive redevelopment potential, create resiliency to devaluation and help you keep your vacancy low. I also believe that location is a major factor in tenant turnover and can drastically improve your long term return on investment by reducing repairs and vacancy due to changing tenants.
Lot – the size and shape of the land you are purchasing. A large lot with a poor shape can really hinder the appreciation of a property. A pie shape lot can make for a very private or secluded property (at the expense of parking space), often great for high end homes whereas a rectangular lot may be ideal for redevelopment. Alternatively, a reverse pie shape lot offers lots of parking and a large front yard but very little backyard space. Always beware or uniquely shaped lots and be aware of the municipality’s bylaws for setbacks ect. An excellent investment-focused realtor should be guiding you through the specific characteristics of a potential investment property, if you need help finding someone exceptional let me know!
Layout – can the home be suited easily? Would it be simple to modernize a reno project? Does the home really take your breath away when you first walk in? Layout has always been my weakness as I have zero design sense. I rely on the experts I work with to analyze the impact of a property’s layout but I do want to share an example.
Let’s say an investor is looking at two flip projects where they intend on suiting a detached house. The lot, structure, and location are virtually identical. The first home could be suited rather simply as it’s a split level and creating a separate entrance is trivial. The second property would require creating a new entrance for the suite at an increased cost of $20,000 and 25 days of construction time.
If an investor could purchase the first property for $15,000 more it would be a much stronger investment. The flipper comes out $5000 ahead on renovation costs, saved almost one month of carrying costs and reduces their overall risk by completing the flip one month faster. I know it sounds obvious to you reading this but I have worked with thousands of investors during my career. Many investors get overwhelmed when they start trying to evaluate and purchase an investment property and do not ask critical questions!
If you are not sure how to prevent this message me and I will share a simple investment property evaluation method I use.
The second set of value I consider is the intangible or speculative aspects of an investment property. Examples of these qualities would be future redevelopment possibility, the ability to subdivide a fourplex and the possibility of land assemblies.
If given the choice of two similiar properties I will often pursue the property that has the possibility of one day being subdivided, redeveloped or the chance of purchasing neighboring lots. These qualities are speculative in nature and should never drive an investment decision but rather improve the long term prospects of a property with strong tangible characteristics.
When you are purchasing an investment property make sure you structure your financing correctly to boost your return on investment by reducing fees, penalties, interest, taxes and legal fees.
If you have any questions or need any help with your portfolio let us know!