You might have heard that buying a home is always a smart investment because the value always rises over time, but is this really true?
Well, certainly home prices go up because of inflation, but you have to look at some more context to understand if your home’s value can rise over the rate of inflation.
If you’re buying your house as a primary place to live, it’s almost always a good decision. However, if you’re thinking about buying an extra investment home, read on to understand if it will rise in value.
The physical structure will depreciate
When investors talk about the home’s value appreciating they are usually referring to the land. The home itself will have more problems the older it gets, such as leaky drains, potential structural issues, and more.
The house requires average maintenance, design updates to keep it in style, and more. In fact, the Internal Revenue Service (IRS) knows that homes depreciate and allows you to note the depreciation for tax purposes.
However, the land won’t have these same problems. Focusing on the land and its location is what is going to get you a solid, smart investment with the highest rate of return.
Of course, this isn’t to say that the property doesn’t matter at all. If you’re looking at selling an investment home, it needs to be in good condition and look well kept-up. And, of course, as the price of the land in the area rises, so will the price of your home.
However, when choosing an investment home, location is typically more important than the house itself.
The land will appreciate
Have you ever heard of an investor buying a degraded home, tearing it down, building a new one, and still making a profit when they sell it? That’s because the land and location were more important than the actual physical structure on it when purchasing an investment property.
Of course, you need to crunch the numbers to be certain that the cost of buying the home, property, and repairs will still be able to give you a profit when selling, but the bottom line is that the location matters more. That is why a beautiful house in an unpopular area might cost hundreds of thousands less than a destroyed property in a popular zone.
Land follows the normal rules of supply and demand. Because demand continues to increase with the population and there’s no way to produce more supply, land in a good area is often a stable investment.
As we know that the value will increase, we just need to understand by how much. To understand if where your potential investment home will go up in value, you need to look at the location and the future potential in this area.
Location, location, location
If you’re buying your investment to live in, it can be hard to give up the perfect house in exchange for a smaller or less beautiful home in a different area. However, if you want to maximize the investment opportunity of being a homeowner, this is the best decision.
Force yourself to look past many of the physical aspects of the home when deciding on which to purchase, and instead zone in on how the location will affect your return.
I do want to stress, though, that you should hire a contractor or someone knowledgeable in the field to understand exactly how much the repairs will cost. Even if the home is in a good area, it’s not a smart buy if you can’t afford the necessary repairs.
If the home is structurally sound and just has a few beauty problems, many of these can be fixed on your own, especially with all the DIY help out there today. Location is the most important aspect, but make sure you consider all the costs before committing to a home that needs work.
What to look for in the location
The home’s location within a home’s neighborhood matters. For example, if your potential investment property is located on a cul-de-sac or dead end, this location is more desirable within neighborhoods with others. This is because there is less traffic and is typically safer for children.
Don’t forget that smaller or less attractive homes can potentially get you much greater returns on your investment. Don’t be fooled by that beautiful looking home for a great price, and take a look at the prices of homes around it as well.
Another tip is that you should look at the area’s future development plans before buying an investment property there. Is a nice, new shopping mall moving in close by? That’s great. Some other structures, though, could decrease the area’s potential value.
It’s also important to look at its proximity to other amenities, such as grocery stores and more. If your investment property is located near a great school system, the value will probably continue to climb.
How to choose?
Essentially, it’s very important to look past how beautiful a home is. If it’s in the wrong location, it likely won’t rise in value beyond inflation. However, if it’s in an area that is near many amenities, good schools, and has new stores and shops opening up left and right (or planned for the near future), it’s likely a good investment decision.
Make sure you understand the full costs before buying and don’t get any investment properties that are too costly or difficult to repair, or else you might not be able to keep your property long enough to see it appreciate.
The most important things to remember are that the physical structure will depreciate in value, but the land will not. So, as long as the numbers work out, choosing a less attractive home in a better location is always the smarter decision.
If you want to track housing appreciation in your area to get a better understanding, you can visit the site of the Federal Housing Finance Agency (FHFA). After you’ve found the area you want to buy an investment property in, Priority Real Estate can help you find the perfect home.
Michele Karl is the Owner/Broker of Priority Real Estate. She can be reached at her email at firstname.lastname@example.org or give her a call at her office at 865-577-6600.