5 Insider Tips for Spotting the Best Investment Property

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Property investment is like any other investment: it does come with risks. You can minimize these risks by using these 5 tips to spot a great investment property. It’s not always the flashiest property you see or the one with the lowest price, so consider these tips for finding gems among the ordinary rocks.

1 – Be Locally Aware

You need to know two key things about the area where you’re looking. First, have a lot of people heard of it? Second, what are property values like in surrounding neighborhoods?

By the time “everyone” has heard of a neighborhood, prices will be at a premium. If you can get in early, while population and job growth are starting to rise, but prices are still lower, you’ll see the best return on your investment.

To figure out what your property could be worth in a few years, consider the surrounding neighborhoods. You’re looking for a property priced below value but in a good (or definitely up-and-coming) neighborhood. An amazing property in a bad neighborhood will never be as valuable as the smallest lot in a really good one.

2 – Check for Money Sinks

Naturally, you should always get a professional inspection before you buy, but you also want to develop the skill to identify problems at a glance. This saves you time, and when you don’t see any of these issues, you know chances are very high that you’re looking at a great investment.

The number one money sink in a home is water damage. Insist on checking the roof cavity, even in an open house situation, and carefully check all ceilings for any sign of water damage. Look under every sink, flush every toilet and run every faucet, and push on the walls behind obvious water sources. If the walls feel at all mushy, sound funny, or give even a little, you’ve probably got water damage.

The other big thing to watch out for is a shifting house. Bring a smooth plastic ball with you whenever you check out a property. Place it on the floor in various rooms: if it rolls, you’ve got potential trouble. Cracks in the walls are another bad sign.

3 – Check With the Local Planning Commission

As soon as grocery stores, restaurants, and spas go in, prices go up. By checking out what’s being built in the neighborhood before it goes up, you could spot the perfect investment property that no one else is noticing.

This is especially true if the planned stores and services are well-known brands (think Starbucks rather than “Cool Beans”). Well-known companies know exactly how to do their research. If they think the neighborhood is worth investing in, you can probably safely follow their lead if the other signs are right.

4 – Look Into Public Transport

If a city is planning to expand their public transport system, you can usually safely assume that neighborhoods served by the system are going to go up in value once everything’s done.

Nearly every city or town of any size will have a public transport commission. This is who you talk to. If you see a property that looks promising in other ways, and then find out it will also be connected through public transport, you may have just spotted a gem.

Just be careful: some cities have grand plans that never come to fruition. Look for public transport plans that have been approved by the necessary city oversight organizations and (where applicable) voted on by the citizens. There should also be a clear funding structure in place.

5 – Always Keep Value, Cost, and Risk Balanced

Cost is the amount you’ll have to pay to buy and fix the property. Value is what it’s worth once renovations are done. Keep these separate in your calculations and remember that the ultimate factor in whether you’re getting a gem or not isn’t cost. It’s the ratio of cost to value.

An Example

Say you’re looking in a neighborhood where a perfect three-bedroom home can sell for $750,000. You find one in immaculate condition for $725,000. You find another that needs about $80,000 worth of work priced at $640,000. If you had to choose between these two, it might be better to go with the perfect property. Yes, the profit is only $25,000 compared with a potential $30,000 on the one that needs work, which also has a lower initial price. But what about the risk?

Factoring in Risk

Home renovations often go over budget. As you tear up one wall, you might find something else that needs to be repaired. Your $80,000 in repairs could easily run to $100,000, and then your profit margin is down to $10,000. But if you could get that same fixer-upper at $600,000, now you’re looking at a more acceptable risk. Find a good cost to value ratio, and you’ll spot your gem.

Put In the Work

Finding the perfect investment property takes knowledge, time, and effort. Don’t let that put you off. With these 5 tips, proper research before-hand, and finally, some hands-on experience, you’ll be able to find the needle in the haystack—the perfect investment property.