Look, I’m not a real estate guy by any means. And, truth be told, I’ve only bought two homes in my life (so far). But, those two purchases taught me an invaluable lesson because one specific thing differed about those two homes. Let me show you by example.
Here was the first house I ever bought:
Pretty nice. This was in Pittsburgh, PA, where real estate prices were (and probably still are) super low. I bought that big old place in 1999 for just $96k, which was an incredible deal, even back then. The owner actually wanted $92k for it, but we offered $96k if he’d throw in some furniture and whatnot.
Then, thirteen years past in that home. And a ton of $$$ went into it. On top of its existing elegance — all-brick construction, terra cotta tile roof, stained glass windows, built-ins, burled walnut doors, and period charm — we had a giant sauna put in (like, an institutional-sized one with benches and all), had the entire home’s hardwood floors professionally refinished, added a library, refinished the attic into useable family space, had the basement turned into useable space, the whole nine. In the end, we had four finished floors of super-nice living space.
It was, and likely remains, just about the best house in the neighborhood. And that was the problem.
You see, when you buy the BEST house in an OKAY neighborhood, you’re leaving yourself almost no room for appreciation because the general range of values in the neighborhood is much lower than your property. Thus, your property’s resale value stays relatively low, even if over time the neighborhood’s average home value level rises a little.
We sold that $96k house for about $150k, which sounds like a profitable thing. But, if we hadn’t invested nearly that whole amount into the place over the years, it would likely have been worth far less.
With the proceeds from House #1 (which I wouldn’t exactly call profit, as we’d invested heavily in House #1), we purchased a home in Portland for $175k. But this time we did it differently. Instead of buying the NICEST home in an OKAY neighborhood, we purchased the WORST home in the BEST neighborhood.
And man, it was a wreck. Okay, it was better than the one pictured above. But, it had issues. The thing was, most of the other homes around us were already selling for $300k+. And this one, while it needed work, was liveable at $175k.
So, over time, we started fixing it up. We knew we’d gain some sweat equity by doing so. But, guess what? The fact that it was in such a desirable neighborhood meant that the median sale price for homes in the area was also rising nicely as we did all of the work needed to make our home the same as the others here. That didn’t happen in Pittsburgh (at least not in the OKAY neighborhood we were in).
And by the time we’d put in all of the tough work, the comparable homes here had nearly doubled in price.
Most of the above happened quite by accident, of course. We had no expectation that the home’s value would increase so much. But, looking back, it all makes so much sense.
The Secret, Simply Put:
Buy the worst home in the best area, not the best home in the worst area. You may be tempted to buy a better house in a worse neighborhood because, after all, you’ll get more house for your money. But, in the long term, it’s just not a good idea. Instead, find yourself something that is (1) liveable or fix-up-able, that is (2) located in a popular / trendy / growing area. By the time you improve that property, you’ll be sitting pretty in terms of equity.
✍🏻 Jim Dee maintains three blogs — Hawthorne Crow, Web Designer | Web Developer Magazine, and Wonderful Words, Defined — and contributes to various Medium pubs. Connect at JPDbooks.com, Amazon, FB, Twitter, Instagram, LinkedIn, Medium, or Jim [at] ArrayWebDevelopment.com. His latest screwball literary novel, CHROO, is a guaranteed good time.