How do you know you’re buying a good real estate investment and not an overpriced property?
I got this question from a blog reader when he asked if a certain project is a good investment.
It can be confusing especially if you don’t know what to look for. Add to that the sheer number of properties being offered on the market and it can be downright intimidating.
It’s not your fault if you don’t know what is a good investment especially when you’re starting out. Ten years ago, I missed out on buying a condo or townhouse in Acacia Estates. Back then, DMCI still did not have the good reputation and track record they have now. So we all miss out on good deals. The important thing is to start developing the skills now.
I’ll share with you 3 factors that you’d want to check.
Before Everything Else, Define a Good Real Estate Investment
What’s your definition of a good real estate investment? That definition will depend on how you intend to profit from the property.
Do you want to flip it for capital gains or do you want to rent it out for passive income?
Different people have different appettites. Some want quick appreciation while others want passive income for retirement. Different objectives will result in different answers. Therefore a property that might be a good investment for John may not be necessarily good for Adriana.
Once you decide how you want to profit, you can start looking at the characteristics of a good real estate investment.
First Characteristic of a Good Real Estate Investment
The first thing you need to assess is the location. You’ve already heard it – the three most important words in real estate are location, location, location.
But what exactly do you look for in a location? Here are 6 things:
- Jobs. Where are the jobs? How many people are working nearby? Are the businesses growing or dying? These are important questions because real estate values are fueled by demand. Whether you are looking for capital appreciation or passive income, both are driven by demand and people want to live near where they work. Who wants to endure traffic? If jobs are being created in the area, real estate values will rise. The reverse is also true.
- Accessibility. How accessible is the property to private and public transport? Is it prone to traffic? How many rides are needed to get to a business district? If you have to take more than 2 rides, it starts to become inaccessible. If there are limited options then it’s not easily accessible.
- Convenience. Is it near shopping malls or commercial areas? Is it near hospitals, schools, churches or sports facilities? Are there good schools nearby? A major consideration for families is the distance to a child’s school. Transferring schools is usually a last resort and if they choose this, it better be to the same or better quality school.
- Security. Is it safe? Are there dangerous neighborhoods nearby? Do you have to pass through bad neighborhoods to get home? These are major turn-offs. Bad neighborhoods are equated to danger so seeing them along the way can dampen future property values of a neighborhood.
- Health & Safety. You want to avoid dangers or hazards. Here are some things you’d want to check.
- Earthquake fault line
- Factories, coal plants, dump sites or other sources of pollution
- Flight path
- Feng Shui. Certain lot locations have better feng shui while others are downright bad. For example, you don’t want a property located “sa tumbok” or the top of a T-intersection.
This ought to explain why certain locations are more expensive than others. You want your initial investment to get as many of these factors as possible to make the future resale value attractive.
Second Characteristic of A Good Real Estate Investment
The next thing that you want to look at is the condition of the property. A property in great condition will demand top price but will require less renovation. A property in terrible condition is an advantage to the buyer because they can negotiate a lower price.
- Curb appeal. Does it look good from the outside? First impressions count. The perceived value of a property is directly tied to how it looks inside and outside. If it looks bad now but it can be fixed, then it’s good for you because you haggle a better price.
- Finishings and fixtures. High-quality finish and fixtures that make a property look elegant and beautiful are definite pluses for a property’s value. If the finishing or fixtures are outdated, it’s good for the buyer because you can haggle a better price.
- Structural. You want properties with no structural issues. You want to avoid seeing huge cracks on pillars or beams unless you intend to demolish the property.
- Space. Extra lot space is an advantage and allows for the possibility of expanding the property. You can add more rooms or make existing spaces bigger. The more possibilities, the higher the perceived future value.
- Feng Shui also applies to the inside of the property. Design elements such as the stairs facing the door, back door aligned to the front door and bed placed in the death position are big no-nos. A positive feng shui property can get higher prices.
- Amenities. Good and well-maintained properties reflect on a property. Having well-maintained gyms, swimming pools and play areas make a property more desirable to live in. Having more amenities that provide convenience and luxury such as private theaters, game rooms, music rooms, function rooms, gardens, etc., makes the experience better and push up perceived values to the right buyer.
Third Characteristic of A Good Real Estate Investment
Lastly, it’s important to look at the value vs. the price. If you get a property where the price < value, you have a great deal! If price > value then you have an overpriced property. The value is sometimes subjective so your job is to deduce the value in objective terms. Here are some suggestions on how to get an objective take on a property’s value.
- Get a third-party appraisal. You can hire a professional appraiser for as low as Php5,000 to get an objective assement.
- Compare to similar properties. You can also get the value by comparing the property to similar properties. If you get the average value of similar properties and your price is below the average then you have a good deal. The lower the price, the better.
- Compute Rental Yield. If it’s a rental property, you can compute the rental yield. This is straightforward. Multiply the rent by 12, divide the answer by the price of the property and multiply by 100% to get the yield. For me, if the number is higher than 7% then you have a good deal because you can get back your investment within 10 years using the rule of 72. Some investors are more conservative and they prefer a minimum yield of 12%. The exact number is up to you.
- Future Resale Value. If you can observe rising property values in the past 5 years, you can expect the value to continue to rise over the next few years. Unfortunately, there is no public database that tracks property values. You’ll have to rely on agents, brokers, research companies and your personal knowledge for data. That’s why I recommend when you’re starting in real estate in investing to focus on an area you are familiar.