What is the difference between a good property investment and a bad one? To understand this, you have to know what a good property investment is, alongside knowing what a bad one looks like. Ultimately, this will require knowledge of what to look for to spot good or bad investment opportunities. When you know some of the telltale signs of each, you can make more informed and educated investments in the real estate market. Thus, you ensure that most of your property investments are good, rather than bad.
Throughout this guide, we’ll discover and go through all of the main talking points mentioned above. By the end, you’ll be armed with everything you need to know about good and bad property investment opportunities. To start, let’s define both of these categories!
What is a good property investment?
A good investment is any investment that generates a positive ROI. For those that don’t know, ROI stands for return on investment, referring to how much you get back from the investment itself. In real estate terms, it means how much money you make from your house compared to how much you invested in the property. Any property that yields a positive return and helps you make money will be considered a good investment.
For example, let’s say you buy a house for $300,000, and end up spending $10,000 improving it. Then, you list it on the market and it sells for $400,000. Here, you’re made a $90,000 return on your overall investment, meaning the property you chose was extremely good!
What is a bad property investment?
Naturally, bad investments are the complete opposite of this. Instead of providing a positive ROI, they make you lose money. Or, they might not generate a ROI at all, and you break even. Breaking even isn’t always a bad thing – it’s better than losing money – but it hardly makes your investment a good idea. Why spend so much money on something that simply doesn’t provide you with anything?
Sadly, there are so many examples of bad real estate investments in the property world. Usually, the biggest problem is that people buy homes, then spend too much money on them. This relates to the initial purchasing price, coupled with the cost of any improvements you made. Too much is spent, reducing the window of opportunity for a good return.
After taking these two definitions, we can say that the difference between good and bad property investments is that good ones generate a positive ROI, while bad ones don’t. In its simplest form, that’s all you really need to know or worry about. However, you should dive deeper into this topic, figuring out what makes an investment fall into either of these categories.
What makes a good property investment?
You know how to define a good investment, but what are the pieces of the puzzle that fall into place to make something worth investing in? We’re only looking at property here, but some of the points might be relatable to investments in general.
A good location
This is so incredibly important when you’re investing in real estate. If your property is in a good location, it will be more desirable. When you sell it, you can command more interested parties because everyone wants to live in this great location. If you rent it, you’ll have prospective tenants lining up keen to pay to live there.
The question is, what makes a location a good location?
- Easy access to public transport
- A friendly neighborhood
- Low crime rates
- Plenty of nearby job opportunities
- Good road access to get to lots of other cities/towns
- Plenty of shops nearby
- Excellent schools in the area
- The area has a good reputation
The more things you tick off this list, the better the location will be. You’ll also find that property prices will rise as you tick the factors off this list. Being in a good location is so crucial as you will find it hard to have a successful investment in a bad place. Yes, bad locations command lower property prices – but that doesn’t automatically mean you’ll find good investments. You can buy a cheap house, but how will you make money? You need to boost the value in some way, but are people willing to spend more money on a house in a bad area? The chances of success diminish when this is the case.
Just enough room for improvement
Investing in real estate is all about looking for ways to make improvements. In fact, this is what sets real estate investments apart from almost any other out there. Sure, stocks and shares are popular and you can make a fortune trading them. However, you aren’t in control of anything, and you rely on the market to dictate prices. With property, you can actually do things that influence the value of your building.
Therefore, a good investment is one that has just enough room for improvement. You can make further investments to improve the property in certain ways, slowly increasing the value. Some of the things you can do might include:
- Extending the home to add more rooms
- Improving the structural safety
- Adding a new roof/windows
- Improving the garden area
- Updating the interior design
- Renovating specific rooms in the home
The list goes on and on, displaying just how much control you have over a property’s market value. Of course, the location is out of your hands and plays the biggest role. Nevertheless, you can still influence things. Bad property investment is one that offers either no room for improvement or too much room. You don’t want to spend too much money improving property or it will be harder to command a return when you sell it.
Free from health concerns
Believe it or not, but a lot of older properties are now littered with health concerns. This is because they contain materials that used to be commonplace in construction but have now been discovered to be dangerous. For example, asbestos, lead, and radon used to be frequently used when building houses a few decades ago.
Nowadays, we know how harmful these materials can be, so they’re no longer used. Still, if you’re looking to buy a house, you can easily stumble upon properties that are full of these harmful substances. Investing in one could be a mistake as you’ve now inherited something that’s technically harmful to your health. You’d need to either sell it as quickly as possible – which will be hard as you need to disclose the problem and will probably make a loss. Or, you get rid of the issue yourself, which links back to the previous point about spending too much on improvements!
Instead, it’s best to avoid properties that cause health concerns. Easier said than done, you think? Not really, all it takes is one simple step as you’re looking at the home. When conducting inspections, find a company like Aegis Environmental to come along and survey the building for you. Companies like this will specifically look for signs of any damaging materials or substances throughout the property. Thus, you can spot them before investing, avoiding this entire issue.
A buyer’s market
Now, this last point is very critical as it can help you snag some wonderful property investments that generate excellent returns. What is a buyer’s market? In essence, it’s when property prices take a bit of a dip. Sellers start lowering their asking prices, putting the power in the buyer’s hands. This usually happens during tough economic periods, and many sellers can rush to sell their homes before the prices get even lower.
Regardless, a buyer’s market means you have more control over choosing your purchases. Not only that, but you also have a chance to get the property for cheaper than expected. The opposite of this is a seller’s market, which is a poor time to invest in property. Properties that are for sale at this time tend to be more expensive as the seller has all the power. While buyer’s markets see property prices decline, seller’s markets see them go up. In essence, sellers can sell their investments and pocket more money than usual.
So, the exact same home can be a good property investment in a buyer’s market or a bad one in a seller’s market! This is why it’s smart to keep an eye on market trends and property prices at all times. Learn if the market is in your favor or not, and it can be the difference between a good or bad investment. Also, the trick is to buy during a buyer’s market and sell in a seller’s one to maximize your investment returns!
On that note, we’ve come to the conclusion of this guide. All of the points in the previous section outline what good property investments look like. Conversely, bad property investments are the opposite of those points. They include houses in poor locations, with no room for improvements, full of health/environmental concerns, and on sale during a seller’s market. Learn to identify a good investment and you will go far in the real estate game.