In this post I outline my method for finding a property that's suited for my objectives.
The first thing to note is that I said 'suited for my objectives'.
This relates to the importance of understanding and knowing your strategy. Before you buy any property, you must know the reason why you want to buy it. I won't cover the strategy side of things in this post but here are some of the key strategic questions you have to raise and answer before you even begin.
* Is it for me to live in or to rent it out?
* If I am going to live in it then how long am I planning to do it so?
* Am I planning to renovate it and sell it for a profit (flipping)?
* Am I planning to develop it?
So once I understand my objective then I start my research. For the sake of this post I assume that the objective is to renovate the house and generate equity. (I chose this strategy as it's the most common investors jump into thinking that it's the easiest way to build wealth.)
The property must be near me or someone I trust. >> You will not be able to renovate a house remotely unless you want to outsource the entire project management to a builder. My preference is that the property needs to be close to me so that I can manage the project myself and save on the project management fees.
Can I live in the property while renovating it? >> This would be very beneficial from the financial point of view as if I can do it then I won't have to pay capital gains tax on the increased value of the property when I want to sell it. However, living in on a construction site could be very straining on other aspects of one's life.
Is the house structurally sound? >> You can renovate a house that is structurally not sound but it can be costly and time-consuming so you have to make sure that your purchase price is low enough to justify it.
Target audience >> Think about who you want to renovate the place for. For example, you don't want to renovate a house with uni-students in mind when there is no university nearby.
Re-saleability >> Are there enough prospective buyers for a renovated house? Think of a mining town where there are rumours that the local mine is likely to shot down soon. It's needless to say that jumping into a project in such situation is a ticket to a potential financial disaster.
Rentability >> What's the projected rent of my finished product? It sounds obvious but imagine if there is an old house where the tenants are paying $500 a week. If you buy the house and spend $100k on renovating it, you might achieve $600 rent. That's an extra $5200 a year. I would not consider that as a success as the return on the $100k is only 5.2%. If our intention is to rent out the place then we have to find the balance between invested amount vs rent increase. You may find that by simply replacing the kitchen bench, doors and drawer fronts will yield an extra $30 rent because the kitchen will have a new feel to it. However, the whole thing would only cost you say $5,000 so the return on your $5,000 is 31%.
Timing >> The area and the project might be fine but what if there is a high risk of some sort of trouble ahead?
Renovate vs. remodel >> Most of the successful renovators focus on cosmetic renovation as it's easier to justify the value of a shiny new floor than the invisibles, such as the internal waterproofing of the whole house. However, sometimes remodelling can yield lucrative returns. For example, moving a couple of walls to fit an extra bathroom into the existing single bathroom 3 bedroom house.
Extension >> Is there a demand for a larger house in the area? Is the land big enough to enlarge the house? Perhaps adding an extra level is very much a feasible option.
Long term focus >> If my intention is to hold onto the renovated house (which is what I would suggest) then what is the likelihood of me being able to do something with the property later on? E.g. add a granny flat or knock it down and build a duplex or even do a multi-unit development.
I hope this post helped you get a bit of insight into some of the critical points that I analyse before jumping into a reno project.