4 Ways to Tell if a Home Will Be a Solid Investment

Young girl poses with keys in front of new car parked in front of a house.

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There are no guarantees when it comes to home value, but these four factors may give you the biggest bang for your buck.

Key points

  • Where a home is located is the single most important factor when it comes to value.
  • It pays to check out the school district before buying, whether you have kids or not.

There can be a touch of anxiety associated with buying a home. Even as we're signing our names to mortgage documents, we're running through a laundry list of questions. Chief among which is whether we made the right choice. Did we purchase a home that is likely to increase in value, or will we be stuck with a loser? Of course, there is no way to know for sure, but historically speaking, we can take comfort if the following apply to our new home:

1. The location rocks

It's not the home we buy that tends to appreciate. In fact, the bits and pieces of the house are likely to depreciate with age. It's the property on which the home sits that appreciates, and where that property is located is vital.

If a house you're considering has easy access to a major highway, proximity to shopping, restaurants, and recreation, those are all good signs. If there are parks nearby and mass transit is available, both can positively impact the home's value.

A study from the University of Washington indicated that homes located near open space and parks are valued 8% to 20% higher than comparable properties without a park nearby. You have to be really close, though, as researchers found that homes as little as a half-mile away don't get the same property boost.

Think about what it is about the location that you like. Are you wild about it because you can walk down the street for a latte and to pick up a few groceries for dinner? Do you love it because it's in a rustic area that feels a lot like Mayberry but is close enough to a major highway to allow you to get to work quickly?

It's the small location-related perks that have the most significant impact on value.

2. Schools have a good rep

It turns out, people really like their kids and want them to receive a proper education. Even if you don't have kids or your children attend a private school, the public school district in which your home is located will play a role in how well your property appreciates.

National Association of Realtors (NAR) data indicates that 24% of home buyers are influenced by school district quality when they select a neighborhood. When you look at buyers ages 31 to 40, that number jumps to 42%.

Even if you never plan to sell your home, your investment has a greater chance of increasing in value if the school district is strong. And if you do decide to sell, you can count on potential buyers checking sites like GreatSchools to determine whether it's the right neighborhood for them.

3. Homeowners Associations are involved

Many of us have a love/hate relationship with our HOA, those bossy folks who tell us how short our grass should be mowed and must approve our choice of exterior paint colors. However, a study conducted at George Mason University showed that properties with HOAs calling the shots have a 5% to 6% higher property value than a comparable property without an HOA.

The increase in value may be due to how HOAs maintain and beautify neighborhoods, thereby protecting property values.

Read more: What Is a Homeowners Association?

4. The "Starbucks Effect"

Here's how it works: Starbucks spends millions of dollars looking for the "perfect" locations to sell their high-priced coffee shop. In this case, the term "high-priced" is not a knock on Starbucks but indicates what's to come.

Naturally, Starbucks doesn't want to build a new store in a location that can't support them, so they look for established and up-and-coming neighborhoods with plenty of disposable funds. And once a new Starbucks goes up, developers get a sense that it's a neighborhood on the rise, and more businesses move in.

To measure the Starbucks effect, Zillow conducted its own research, comparing the value of home in 1997 with the value in 2014. What they found was that "normal" homes (not located near a Starbucks) appreciated by 65%. However, homes located near a Starbucks appreciated by a whopping 96%. The homes that appreciated the most were within a quarter-mile of the coffee shop (approximately two to three blocks).

But that's not where the bump in appreciation ends. Harvard Business School did a study of its own and found that when a new Starbucks is built in an area, homes in the same zip code increase in value by 5% within one year.

Read more: What Is Home Equity?

It's not just Starbucks

Two other retailers that signal higher property values are Trader Joe's and Whole Foods. An ATTOM Data Solutions analysis looked at how much homes appreciated between 2014 and 2019. While the average equity nationwide increased by 25%, the equity in homes located near a Trader Joe's increased by an average of 37%, and equity in homes located near a Whole Foods jumped by 31%.

While it seems unlikely that any retailer could make that kind of difference, it may be a case of the chicken and the egg. Do these stores make an area more valuable, or do they build in these areas because they were already valuable?

Likely the latter. For example, Trader Joe's looks for locations where people can access a good education and where amenities -- including other desirable stores -- are plentiful.

However it comes to be, if you spy a Starbucks, Whole Foods, or Trader Joe's near a neighborhood you're interested in, take it as a good sign.

There are so many unknowns when you buy a house. Will you like your neighbors? Will the furnace last through winter? Will metro buses run on time? While you can't know with certainty whether your home will appreciate the way you hope, you can increase the odds by carefully buying in an area that is likely to be attractive to buyers if you ever decide to sell.

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