INVESTING IN HOUSES

1) Identify first in your target city or the city you live in the neighborhoods that have the best prospects for strongest increases in housing values. These are the most attractive neighborhoods in which demand outpaces supply or growing developing neighborhoods in various ways. The book Real Estate Investing for Double-Digit Returns provides many clues and hints in terms of what kind of locations will experience the strongest property value increases in a metropolitan area.

2) Locate house buying opportunities in these neighborhoods

3) Screen these buying opportunities. If the house is being sought for owner occupation, then identify houses that have the features and amenities that you are looking for. If the house is not being sought for owner-occupation but purely as an investment vehicle, then identify the ones that fit your investment style (rehab, ready to rent, off plan, etc).

4) Make quick and preliminary assessment of houses identified in step 3 and short list the ones that appear to have the strongest potential for capital gains either in the short or the long term. In simple terms, you should be looking for houses that will maximize your annualized capital gains, that is the difference between the purchase price and the price that you will be able to sell it (normalized for the number of years between the time of purchase and time of sale):

Capital gain = Purchase Price – Sales Price –Sales Cost

Therefore, the purpose of the investor is to minimize the purchase price compared to the true market value of the property (this means finding properties that can be bought at a discount from their true market value) and maximize the sales price, which means finding houses that have the greatest value increase potential. The book Real Estate Investing for Double-Digit Returns discusses extensively what types of properties have the best chances for delivering largest capital gains to the investor.
5) Do a thorough due diligence on the short-listed properties and choose the one that will maximize your expected annual return over the holding period of the investment. In the case of owner-occupation the buyer needs to decide, perhaps based on life-cycle stage, the most likely time that he/she would want to sell the house either for upgrading to a larger unit or downgrading to a smaller unit.

In sum, investing in houses for significant profits is not easy and requires a systematic approach and thorough and time consuming due diligence.



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