Tips to determine if you have a good investment property.
For many people, a home represents a financial investment as well as a place with sentimental meaning. You should look for a property that will not only be a good fit for your family’s current needs, but also—with any luck—increase in value over time, to become an asset that can help finance your long-term goals. That’s why it’s important to consider whether a particular home would make a good investment.
Consider market changes since the initial purchase.
When considering the income you might see on your investment, you need to look at the starting price and then add any changes to the market since that time. (In the case of a property you are considering buying, this would be the change that is likely to occur over the period in which you plan to keep the home before selling.)
You will want to evaluate market inflation or deflation in that area since the property was purchased. It is worthwhile to spend some time getting to know your local market, doing research and tracking trends. Ideally, market values have increased which in turn will likely boost the value of your particular property. If the market is in the early stages of a positive transition, it may be smart to hold off on your sale for a while so you can reap the rewards of an upward-moving market.
Equity is an important factor.
Finding out how much your home is worth is an important first step, but it is only one part of the equation that will determine possible profit or investment potential. A successful investment is all about profit. Once you know the approximate value of the property, you must then look at the amount of equity you have. Equity means the excess of the value of the property minus the mortgage debt against it. In other words, it’s the amount of the home that you’ve already paid for, with any increase in value since you purchased the home also factored in.
The amount of equity will help you determine your potential return on investment since you must satisfy the balance of the loan when you sell the home before you can reap any profits.
A comparative market analysis provides useful data.
A comparative market analysis can be a valuable tool in helping you determine how much your home (or a home you’re thinking about buying) is worth. The comparative market analysis (CMA) is a report that reviews key pieces of data related to a property to estimate its value in current market conditions. Performed by a real estate agent, the CMA is different from an appraisal, which is done by an appraiser. Property owners and buyers often find the CMA to be revealing because it is common for the average person to be inaccurate in guessing the value of a property. Values can change quite a bit in just a few years, so this estimate may be surprising even if the property was just sold or appraised a few years prior. You can also find comparables for your home by looking at your property on Trulia.com.
Think about how to price your home.
Selling your home always involves a fair amount of strategic planning, and this is true when it comes to pricing. When deciding how to price your home, you want to aim for that perfect balance between getting the highest possible profit and pricing it too high for the market—which would mean it is likely to sit quite a while before you get a buyer.
If you have a CMA done, that will be a good start. You may also want to get an appraisal. Your real estate agent may also be able to give you an informal rough estimate. Look at the recent sale prices for homes in the area that are similar to yours. (If you have an appraisal or CMA done, it will also include some “comps” that can give you a useful reference point.)
Tip: if you have a little time before you plan to try and sell your home, consider some improvements you could make that would add value to the home (boosting your equity) or make it more attractive to buyers. Your real estate agent can probably offer some insight on the things that are most attractive or in-demand to buyers in that area.
Learn how to know if a home will gain value.
If you are contemplating buying a home with the hope of making it an investment, you will want to try and focus on homes with the greatest long-term profit potential—meaning, properties that are likely to gain value over time. In some ways, this amounts to making a sort of educated guess. You will also need a bit of luck on your side, as it is nearly impossible to predict with total certainty what may happen in a specific market over a period of years in the future.
Again, many of the tactics mentioned above will be helpful. You want to develop some insight and expertise with that particular market and be perceptive to subtle signs of early developing trends. A neighborhood or community that is on the cusp of exploding or seeing lots of development can offer significant growth potential, so it may be smart to get in on the early stages before home values start to climb.