What Makes a Good Real Estate Investment – 4 Ways to Buy a Superior Home
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The question of the day: what makes a good real estate investment?
We’ve been sitting on our two family house for almost 6 years now, mystified that it’s actually worked out so far. It was a true ugly duckling when we purchased it. After putting our heads down to work for so long, we looked up to discover it’s doubled in value since then.
Bug-eyed and practically surprised, we have to ask ourselves:
How?
How did that even happen? And how is it that this one singular investment has so drastically affected our net worth? In other words… what has made our real estate investment such a good real estate investment?
Four things.
- Appreciation
- Value add
- Fix & flip
- Rentable asset
Let’s take a look!
Our Perspective
The Backstory
Let me tell you a story. It’s about the weekend we first saw our two family house.
Derek and I first saw it on a Thursday. It was rough – a beat up foreclosure, no doubt – but we thought it might work.
We brought my dad back two days later, to get a professional carpenter’s opinion.
That Saturday was one of those hot, sweaty, July days. You know when the cotton hem on your shorts sticks to your thighs when you crawl out of the car?
That kind of July day.
It brings out the honesty in people.
Viewings
Summertime weekends make for a busy real estate season, and this house was hopping. People were taking turns to go inside. We had to wait, as a couple was in line ahead of us with their realtor.
They didn’t spend long inside.
In fact, it may have been only five minutes.
They exited the house laughing.
Laughing.
They were laughing at our house. My heart broke at the sight! It wasn’t the house’s fault it was in poor condition, with its broken windows and sagging ceiling.
I still remember the sound of their cackling, the whites of their eye rolls, the toss of the woman’s hair, as they descended the old concrete stairs, on to the next listing for the day.
Kismet
Our turn came, and there was no laughing.
There was only vision.
Like a wise seer, my father saw only potential. He folded his arms across his chest, quietly stroking his mustache as he analyzed everything from the exterior structure to the joists in the basement. “The bones,” they call it.
Naturally, as all the houses do, it was talking to him. It’s a superpower that belongs to people like my father, who spend so much time and skill on the creation of the buildings we call homes.
We arrived outside and took a few steps down the block, eager to know: “Dad, what did the house say to you?”
Dad, solemn, peering up, in a whisper:
“Please love me. Love me, and I will love you back.”
He wasn’t wrong. This house has certainly loved us back.
I often reflect on that day and ask, how, how has this house become such a fantastic investment? In retrospect, the decision seemed so fast.
As my friend Jen Sawyer points out in her article on house searching, you don’t get much time to analyze for making such an enormous decision.
“I thought back to the 15 or so minutes we spent touring our potential new home. I’ve spent more time deciding whether or not to purchase a new pair of pants!”
Jen Sawyer, for Jesuits.org
We knew that buying our house was a good idea, but we didn’t foresee why. As I mentioned in our post about the most important day of your house search, all we could figure was that owning would be better than renting.
It’s been almost 6 years since that wonderful day we bid on our house. We’ve finally pinpointed exactly how our house became a “grand slam.”
Perhaps you will consider these potential benefits of what makes a good real estate investment.
What Makes a Good Real Estate Investment – 4 Items
1. Appreciation
What makes a good real estate investment?
Appreciation.
Let’s turn to Investopedia for the definition of appreciation:
Appreciation is an increase in the value of an asset over time.
Investopedia
An asset that appreciates is one that is worth more money as time passes.
It is widely accepted that real estate will increase in value over time. A house purchased in 1980 is probably worth more money in the year 2022.
On the contrary, an example of a depreciating asset would be my laptop – over time, it will be worth less money.
While yes, the real estate market swings up and down depending on what section of history you zoom in on – overall, over time, the value of a house will increase.
While we only purchased our house six years ago – and yes, we happened to buy our house in 2016, right before our local market exploded – it would have appreciated just by sitting there, even if we hadn’t improved it a lick.
2. Value Add
What makes a good real estate investment? The opportunity to add value.
I’m borrowing a term from the commercial real estate sector here, but the concept remains the same: add something valuable to the property, and its worth will increase.
In the residential real estate market, number of bedrooms and number of bathrooms have a lot to do with it. A two bedroom house will be worth a little bit less than a three bedroom house of comparable size and lot.
Real estate investors often talk about “value add.” An investor might see potential in a “2 bedroom house with an office.” Why? That “office” might easily convert to a bedroom by adding a window and a closet.
Or, someone might convert a half bathroom (read: toilet and sink, but no shower) into full bathroom (toilet, sink, and shower/tub). We did this in our basement bathroom remodel – turning our “6 bedroom, 2.5 bathroom house” into a “6 bedroom, 3 bathroom” house.
Good examples of value add:
- improve landscaping
- add a (legal!) bedroom
Do you get the idea? See beyond what’s in front of you, and you might find ways to add value to a property.
3. Fix and Flip
What makes a good real estate investment? A possible fix and flip.
This notion became pretty popular after the 2008 crash – buy a property at a low cost, fix it, and sell it for a higher amount.
We’ve all seen Fixer Upper on HGTV, right? If you listen closely at the end of each episode of Fixer Upper, Chip will break down the numbers – what they bought the house for, what they spent to fix it, and what it’s worth now. He’ll say “you’re upside right on this thing” by “x” number of dollars.
I may be from Jersey, but I know that’s Texas speak for “if you sold it right now, you’d make a profit.”
That’s what would make a good fix and flip – you’d make money, even by spending it, because you’ve fixed it so well that you can profit by selling.
We’ve personally done the “fix” part of this equation. Whether we will eventually take advantage of the “flip” part remains to be seen.
4. Rentable Asset
What makes a good real estate investment? A cash-flowing asset.
This is where ol’ buddy ol’ pal Robert Kiyosaki and Rich Dad, Poor Dad comes in. He philosophizes that rich people spend their money on assets – that is, they spend money on things that make more money.
According to Investopedia:
An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.
An asset can be thought of as something that, in the future, can generate cash flow…
Investopedia
I highly encourage you, if you are shopping for real estate in any way, consider purchasing something with an asset!
Examples of potential property assets:
- A second unit
- A driveway
- A storage space
- Boat dock
- An airbnb
- Land to farm
Keep your eyes peeled for things like these to make your property pay you back!
Final Thoughts on What Makes a Good Real Estate Investment
Derek and I often recall that couple from that sweaty July Saturday, laughing at our poor house on their way out the door. We wonder what sort of real estate investment they finally made that summer.
Our two family house possessed all of these benefits, all wrapped up into one house. Guess who’s laughing now!
Appreciation, value-add, fix and flip, and a rentable asset have proven to make this house a grand slam!
You may also like:
- Buying a Foreclosure Home – 10 Things to Know Before Bidding
- Buying a Multifamily Home to Live In – 58 Quick Questions to Ask Yourself
- Our FHA 203k Loan – What it’s Really Like
