Homes are pretty versatile, as has been their transformation over the last 150 years. Housing has dramatically changed from its primary function of providing basic shelter and security.
Today, homes offer something for everyone. We sleep at home but many of us also work from home. Homes can be an entertainment venue. They may make a statement about our financial or social standing. Homes serve as vacation and staycation destinations. Homes are tax shelters and wealth builders. They have been credit enablers and debt consolidators. Homes have come a long way from the small miner’s cabin in Coloma or the farm house in Camino.
The majority of homebuyers today are focused on finding a nice place to live. They want to buy the most amount of home they can reasonably afford in the best location. There are other buyers, however, looking to buy a good rental home as an investment vehicle. Their goals are cash flow, short-term tax shelter and long-term appreciation with more favorable tax treatment upon the eventual sale of the property. Then there are the flippers who look to buy homes with physical problems. Their goal is to solve those structural or cosmetic issues as quickly as possible and resell the home for a quick profit.
There is a need in our real estate market for all three types of homebuyers. They each add a different dimension of balance to the economics of real estate. Their objectives are different, as are the properties they seek and so are the rules for their property acquisition.
Here are a few to ponder:
Size matters. Normally, owner occupants should buy the largest home they can comfortably afford. Singles or couples will grow into a larger home with the addition of roommates, a new spouse or children. Buying a larger home initially may prevent having to sell and buy a larger home in a few years as the family size grows. Move-up buyers may not have a growing family but they usually need more room for their accumulation of life treasures. They often have hobbies or work from home and that requires more space. Their adult children might come home to mom and dad for extended stays.
While homeowners should buy large, investors should think small. The rate of return on a smaller home is greater than a larger one. As an example, a nice 1,500-square-foot home will rent for $1 a square foot or $1,500 a month. The market rent for a 2,100-square-foot home is $1,650 or $.78 per square foot. Smaller homes are more economical to refurbish for flippers and cost less to maintain, repair and utility costs for investors.
Beautiful landscaping is a visual pleasure to homeowners but should be avoided by investors. Paying a premium for a home that has a garden, lush lawns and mature landscaping is generally worth the price for an owner who enjoys working in the garden, mowing, fertilizing and caring for plants. Investors should pass on any home with much more than a small patch of grass. Here’s why. Landscaping requires continued attention and water. Most tenants don’t have the time or inclination. Regardless of what the lease says about maintaining the landscaping, they won’t. Flippers, however, must plan on landscaping as part of their rehab since they are attracting a future homeowner and not a tenant.
Quality vs. quantity. One mistake investors often make when deciding on an investment property to buy is injecting their personal preferences into their decision. They like landscaping so they want a rental house with landscaping. They like quality features so they look for homes with granite counters, crown molding and hardwood floors. Although all nice features for owner occupants, they are not for investors. Granite counters and hardwood flooring will not rent for much more than tile counters and vinyl. Investors would not buy a company’s stock based upon its cute logo and shouldn’t buy rental houses based upon their personal likes and dislikes.
Less is more. Fourth bedrooms make great home offices, large decks extend the home’s living area, pools are fun and attractive, hot tubs relaxing, fireplaces warm and cozy and RV parking is convenient. All of these additional features are attractive for owners but a risk for investors. Flippers will usually steer clear of large decks and pools which are costly to repair and they will discard hot tubs.
Unless you live in the box, think outside of the box. It makes sense to choose the family’s home located in a neighborhood where they feel most comfortable. Some place close to family and friends and not too far from work. Investors and flippers should seek out the best income opportunities regardless of location. As an example, homes in Auburn are priced 10 percent higher than in Placerville but rent for 30 percent more. The median selling price of homes in Citrus Heights is 20 percent less than in Diamond Springs but the rents are comparable. I wouldn’t want to live in downtown Sacramento but it has a lower vacancy rate than any area in the region.
Whether you’re currently or on the path to becoming a homeowner, long-term investor or short-term flipper, there are rules of engagement that you should learn be before buying a home. Naturally, there are exceptions. As we say in the business, “price cures all ills.”
Ken Calhoon is a real estate broker in El Dorado County. He can be reached through his Website: kencalhoon.com.