Property factors you can change
When you evaluate any property as an investment, you’ll want to look at all the negative physical characteristics that are helping to devalue the property. For example, many older homes have what’s known as functional obsolescence, and they are run down due to age characteristics such as no insulation, poor or inadequate wiring, old plumbing fixtures and pipes and/or no off-street parking, just to name a few items. The house may be in dire need of repairs – for example, it may need a new roof, new windows, a complete paint job, or possibly new flooring. All these items are property factors you have control over – you can change the run-down, obsolete parts of the house by throwing money at the problem.
Of course, you’ll need to first determine what the market value of the property will be after you rescue it, and turn it into a spectacular product. Then you’ll have to subtract your cost for making all the necessary upgrading repairs. You’ll then be able to figure out the price at which the property should be sold for you to make a profit that meets your own personal return on investment (ROI) requirements. If you think you have a chance to make a deal for that price, then by all means make an offer on it.
Property factors you can’t change
Now, figured in to your estimate of how much the property will sell for once improvements are made to it, is the neighborhood and exact location the property occupies. Obviously, you can’t change this factor.
I don’t believe in the concept of a “bad” neighborhood as a reason to deter you from property investing. Everything’s relative in real estate. An area with historically higher crime rates will have commensurately lower absolute house values. And these areas may offer opportunities for the property investor who’s just getting started, and who may not have the financial resources to buy in to a better area. If you look carefully block by block, even in an area with a higher crime rate relative to a lower crime rate area, or in an area where schools have students who perform more poorly on standardized tests than other districts that are better rated, you can still find blocks which look great, are well-kept up, and will hold their value over time. And there will always be great buys waiting for you there as well. You may not be able to change the entire neighborhood, but you can surely help upgrade it, and most importantly, make a nice profit by doing so.
Of course, in general people like to work close to their jobs, and so areas which offer better opportunity for commuting (close to public transportation or close to major highways, for example) will be more highly valued than those that are further away. Likewise, proximity to schools and shopping are also more highly valued.
Beware environmental obsolescence!
These are the set of issues that are the most difficult to overcome, and have the most negative effect on valuation. Beware of houses that are close to or directly on main roads, near to highways, commercial buildings, parking lots, overhead power lines, cell towers, train lines or any major source of noise pollution, eyesores, town dumps, factories (or former factories), or any source of past or present chemical pollution. These are the kinds of properties to avoid, because you cannot control public perception of negative environmental factors.
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