Over the years, clients and friends have often asked me, “Is this house a good investment”. Sometimes the answer to that question can be an obvious Yes or No. Location factors or construction defects can provide fairly quick positive or negative feedback. Often times though the answer isn’t quite as obvious or even possible to answer for anyone except the actual buyer.
A buyers assessment of whether a particular property is a good investment or not depends on many factors. Those factors also vary depending on the purpose of the purchase. An owner occupant will have different considerations than a multi-unit building buyer even if the buildings are in the same neighborhood. A Condo buyer will have different ideas than a detached single family homebuyer.
For an investment property buyer a good deal of the answer to that question is math. What condition is the building in; does the building cash flow; what are projected upkeep costs; and can I keep the units rented?
For a single family home buyer the question isn’t necessarily so easy. Whether the building cash flows or not isn’t relevant. When a homebuyer asks if a property is a good investment, what they are really asking is ‘Will I get my money back along with some extra when I go to sell?’ This question of course goes to how we view homeownership. Typically when buying a house, we want to anticipate a sufficient profit from the sale of that house in order to buy the next bigger house; retire; fund college tuitions; or start a business.
Obviously there are no guarantees. A great looking investment today can be a total loser in 10 years if the neighborhood changes for the worse dramatically or a gas station is built next door. There are however some questions that a homebuyer can evaluate that may help.
Do I really ‘like’ the idea of living in this house, in this neighborhood? If you do, chances are future buyers may as well. If you are provisional about it, future buyers may also be hesitant.
Is this a short term or a long term purchase? Some houses will work well from an investment viewpoint in the long term but not so well in the short term.
Are you getting the property for a reasonable price that allows for equity to build up?
Does the house have options to upgrade or improve to gain equity? Gaining additional equity in a completely rehabbed house may be strictly tied to the local market values. A house that you can improve over time can allow you to build equity through those improvements.
How is the neighborhood; stable, on the decline, on the upswing? For a short term purchase this can be a big factor. For a long term purchase it is typically less of a concern. Up and down swings in neighborhoods are common.
What do other house in the are look like? Are house being maintained or not? Is that a lot of rehab going on in the area that will bring values up over time?
In the end analysis the question has to come down to more than just money. Part of whether a particular house is a good investment or not depends on how well that house serves your family needs. It is important to look at how well your family will live in that home in that location. Are schools, parks, transportation and general services nearby? Will this house allow you improve your life in other ways? For instance, House A needs more improvements but will greatly reduce your travel time to work. This in turn can allow you to spend more time at home and have dinner together. House B on the other hand needs no improvements but is further away from work. You would be driving more but you would ‘own’ your weekends because you wouldn’t be working on the house all the time.
Taking such factors into consideration, it becomes impossible for anyone but the actual buyer to make a final determination as to whether a house is a good investment. A great financial investment may not be the best family investment and vice-versa.
I hope you find this helpful in your decision making process. Feel free to contact me about your home purchase needs.