Step 3: Long Term Growth

So you’ve figured out your budget, found a lender and real estate agent to work with, and are ready to start honing in on the neighborhood you want to buy in.

This is where you need to be strategic.

My goal when I buy a rental property is to buy in a neighborhood that fits my budget with the expectation that property values will increase over time.

Because you can control your budget, the second half of the previous statement is where the research comes in. Here are three ways to estimate the expected growth of a neighborhood.

1. Home prices over time

It sounds simple because it is. Look for the resale value of homes in your desired neighborhood that are selling for higher prices than their most recent purchase. Almost all real estate websites will show you the purchase price on the most recent sales of the property. This can tell you if homes in your desired neighborhood are increasing in value over time, and by how much.

You can also use this info to figure out some other details about your neighborhood like how often people are buying and selling.

2. Property taxes

A good way to estimate the potential property value growth in a neighborhood is to reference property tax changes in that neighborhood. Property taxes generally increase over time, but the rate at which they increase can tell you how fast that neighborhood is growing.

Your city, as well as most real estate websites, show the property taxes for each listing over the last few years. Increased property taxes can be a good signal of a neighborhood that is increasing in value. This is because taxes increase to fund public projects that can be good for neighborhood value such as schools, parks, and public transportation.

Even if property taxes are relatively stagnant, tax assessments can be a great stand in for increasing property values. Tax assessments allow the city to assess each home’s value compared to similar houses in the neighborhood based on things like square footage or bedrooms and bathrooms.

The screenshot below is from a popular real estate website and shows property taxes and tax assessments in a neighborhood I own an investment property in.

Screen Shot 2020-06-12 at 12.59.31 PM

As you can see in the image above, property taxes really haven’t changed much in the last 3 years, but the tax assessment value really has. This shows me that similarly sized homes in the neighborhood are increasing in value, which is a great sign for my investment property.

Side note on increasing property taxes: if you expect taxes on your property will increase, budget that into the rent prices to accommodate any changes, or expect to raise rents as needed. I live in a state where property taxes are baked into my mortgage payments so the full tax is paid each year in monthly increments. If your state does not do this, expect a tax bill each year regarding your property.

3.    New build and house flipping

Everyone’s familiar with house flipping thanks to HGTV. These are teams that buy properties that are in need of some updating, do all the renovations, and sell for a profit – usually as fast as they can.

House flipping activity in your neighborhood can be a great sign of increasing home value. As my wise real estate agent once told me, once one flips, the whole neighborhood goes. House flipping activity, or new builds going up, can be a great sign of changes in your neighborhood.

Other good signs

New parks, schools, and public transportation in the neighborhood you’re looking to buy in can be great news. Driving around the area you want to buy in and scoping out upcoming changes to the neighborhood can help you better understand potential changes to market value in your neighborhood.

But if your plan is to rent out the house, not sell it, why do you care about increasing home value?

Increasing property values in the neighborhood you are looking to buy in are a good stand in for potential rental value.

Let’s say you buy a place and over the next 10 years the property value doesn’t move much and the neighborhood stays about the same – you’re essentially going to charge about the same rent over the whole ten year period.

Let’s say that same rental property is in a neighborhood that gets increased access to public transportation, a new restaurant in walking distance, or a dog park. Rent prices can increase as the value of your neighborhood goes up. That mean rent is going up while your mortgage payment stays the same – this increases your monthly cashflow. 

And the last thing on property values is that you never know when the equity in your investment property will be needed. You may have a health emergency, amazing new business opportunity, or any other life event that could put you in a position to need to sell a property. Much like any other investment tool in your life, you should look for an investment property that will grow in value over time.

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