How to tell if you're buying good resale value in a home

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While most people buy their homes primarily as places to live, there's no question that investment value and resale potential are major factors too.

In a piece on HGTV's FrontDoor.com, Dian Hymer offers some tips for how you can tell whether the home you're buying will have good resale value: Buy a home with a convenient location, don't buy the smallest or largest home in the neighborhood, look for good natural light and a strong floor plan, and avoid homes without a bathroom on each level.

This advice is good as far as it goes, but there's just one problem: It won't help you determine whether you're overpaying or buying in a market that is poised for exceptionally weak price appreciation.

It lacks any valuation perspective. Just as you can lose money in the stock market by overpaying for shares in great companies, you can also make a bad investment by overpaying for a fantastic house.

Indeed, many of the best buys in real estate can come from properties that are far from ideal. If you find the pefect house, it may cost too much.

Here's a strategy that I think should be used in combination with the ideas Hymer mentions: Evaluate the home as an income property. If you can buy a house with 20% down and a 30-year fixed rate mortgage and spend less money per month than you would on a comparable rental after including the mortgage, insurance, and taxes, you probably have a property that will make a solid long-term investment.

Over the long-term, rental rates go up and if your house generates good cash flow, you'll be able to find a buyer. At a minimum, a house that will cost you far more per month than a comparable rental is likely to be overpriced. Use this calculator to run the numbers.

To find out how much the home would be worth as a rental, check listings on Craigslist or in the local newspaper -- or e-mail the listing sheet for the home to a few local property managers and pose as a potential client.

Of course if you're buying for your own use, you may not be overly concerned about the precise value of the home as a rental property. But still: Running these numbers can help you avoid overpaying and may help you spot a great deal.
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