When I started investing in real estate, I didn't expect how many people in my life would start sending me Zillow links with zero context and ask, Is this home a good deal?.
There is a factual answer to that question, we can look at comparable homes in the neighborhood and calculate an estimated value based on square feet, number of bedrooms/bathrooms and how updated the home is. But there is a difference between a good deal for a certain neighborhood vs. a good deal for you and your goals.
My goals as an investor are wildly different than those of a family of four. My main criteria as an investor are to find a property that I can add value to and will cash flow, while a family of fours main concern may be looking for a home that is move-in ready and in walking distance of their childrens school.
While it can seem obvious to you what your goals are, real estate can be incredibly distracting and emotional! Suddenly youre looking at a home with an amazing chefs kitchen, something you never knew you wanted or needed, and your original budget and must haves have been completely forgotten in the excitement. Or in the case of my friends and family they’re sending me links to duplexes without first asking themselves, “Do I want to be a landlord?”.
To avoid getting emotionally carried away in the moment, set your personal criteria before you ever look at a single home for sale. Write your goals down and keep them with you while you shop for homes to bring you back to reality when youre feeling the emotional pull to abandon your criteria.
A hole in the ceiling...
but hardwood floors and original built ins!
Some questions to consider when finding your own personal criteria for what a good deal is for you:
What can I afford?
A home has more expenses than the initial down payment and monthly mortgage, budget for property taxes, insurance, maintenance and emergencies as well. Property taxes should be on the listing (but remember, taxes typically increase annually) and insurance is easy to estimate by reaching out to an insurance agency for a quote.
Maintenance is usually the hardest expense to budget for, there will always be an element of the unknown. Sometimes brand-new water heaters break within the year or that old tank of a furnace is still going 20 years later. There are a few rules for how much maintenance a home will require, such as the 1% rule which says the home will require approximately 1% of the purchase price to maintain annually (so a $300,000 home will require $3,000 in maintenance annually). This is a great place to start, then look at the current condition of the home and estimate what large repairs it may need in the coming years. I like to air on the side of caution and have an emergency fund available for these unexpected expenses.
Both my investment properties were fixer-uppers that I immediately renovated; this has made my maintenance cost low after the initial large expense of the renovations. Yet, there was a large hail storm in Minneapolis this summer so I am looking at replacing both the roofs on my 2 properties. Thankfully insurance will be covering the cost, but I am still responsible for the deductible.
How much maintenance do I want to take on?
This goes hand in hand with determining your budget. A fixer-upper will be listed for a low price relative to homes in the neighborhood but with that will come with a host of cosmetic fixes and deferred maintenance. If Home Depot isnt your favorite place to visit (live in) on weekends then you will be paying for those savings through how miserable your homes maintenance is making you. You may also simply be paying for those savings through the cost of repairing/renovating your home. Materials and labor have risen considerably over the past few years making even the most basic updates cost prohibitive.
Be realistic with the amount of work you want to take on (or manage), the true cost of the repairs or updates needed and always leave a healthy buffer for unexpected expenses. Same as above, since I immediately renovated both my properties after purchasing, I have not had much maintenance on either of them, but there have been a few minor issues like a leaky sink or loose door handle that pop up.
What is my ideal location?
Whether youre looking to buy a property as a rental or as your primary residence -location is the one thing you will never be able to change. Take this question seriously, if this is your primary residence ask yourself what kind of lifestyle you currently live, if you want to maintain it or change it? Many times new homeowners will sacrifice living in a prime location to purchase a home, but then they may miss the convenience of their old location and are resentful of their new home. For me, I am willing to live almost anywhere as long as I have easy access to nature that does not require me to get in my car. I take a walk daily and it is absolutely non-negotiable.
For real estate investors this question is a bit more complex and a post all on its own, but as an investor you should be weighing a locations economic indicators such as job growth as well as overall neighborhood safety and character.
What are my must-haves? Nice to haves?
Last but certainly not least what are your non-negotiables? What are your absolute dream wants that may over shadow other features? Write these down, as you get into the home search process it can be hard to find a home that has everything you want or need. A trade-off will likely need to be made and its helpful to reference this list of musts in the moment to make sure you are ok sacrificing one must for another. Ask yourself again, what kind of lifestyle do I want to live? If you have 3 kids that all play hockey, a mudroom may be absolutely non-negotiable to manage all that gear. Whereas for me and Nibbler (my yorkie) a small coat rack is all the more mudroom we need.
Now you’re ready to find your own deal.
If you havent yet, write all of this down! I cant say enough how easy it is to get carried away or discouraged during the home buying process and forget all about your original goals. Writing your goals down helps you stay the course and buy a home that is truly what you want and need despite whatever the real estate market will throw at you.
Now that you have your personal criteria set, pair this with the more factual analysis of comparable homes in the neighborhood and you will be able to answer the question Is this home a good deal? regardless of the situation.
