'The Best Houses Are The Ones That Are Really Dated' — Graham Stephan's Surprising Wealth-Building Strategy

Location isn't the only factor that determines if a house is a good investment. There's a lot that goes into finding a great deal, but real estate investor Graham Stephan recently identified the top factor investors should look for in a home.

"The best houses are the ones that are really dated," Stephan said in a recent clip. 

Buying a new home limits your profit potential, and investing in a nightmare home can result in a lot of sunk costs and very little to show for it. However, if you focus on dated homes, the profits can be promising. Stephan expanded on this point and shared a valuable lesson for real estate investors.

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Buy Undervalued Properties That You Can Fix Up

Stephan emphasizes buying undervalued properties that you can fix up. Some sellers won't want to waste their time renovating a home and prefer to sell it at a discount. These types of opportunities allow investors to step in with sweat equity and boost the property's value.

The issue with buying a new property is that an investor doesn't have as many ways to enhance that property and boost its value. If the kitchen is state-of-the-art, you have fewer options to improve it than a kitchen that hasn't been changed in more than 40 years. 

However, not every fixer-upper is a great deal. Stephan encourages investors to focus on properties that need cosmetic upgrades. These properties should be structurally sound. It's best to avoid properties that have issues with the roof or foundation.

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Compare The Listing To Other Properties

Before you buy a property that needs some fixing, you should compare its market price with a similar property in the area that doesn't need any fixing. For instance, if a fixer-upper costs $500,000, and a similar, up-to-date property costs $600,000, there is a $100,000 gap.

If it only costs $70,000 to get the property in good condition, your $500,000 property will become a $600,000 property.. However, if it costs $150,000 to update the same $500,000 property, you're under $50,000.

Anticipating the total costs of bringing the home up to date and calculating the gap between the current price and how much the home can be worth with some upgrades can help you make better investment decisions. Keeping these numbers in mind can help you distinguish the difference between profitable fixer-uppers and homes with no shot at profitability.

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Flip Or Rent

Some people fix up properties and proceed to flip them right away, while others fix a property and then list it as a rental unit. Stephan likes to have tenants so his properties can generate cash flow, but there are pros and cons to both approaches.

Flipping a property gets it off your hands sooner. You get the capital, which you can reinvest into another fixer-upper and repeat the process. Fixing and flipping properties isn't passive, but you don't have to deal with any tenant nightmares. However, if you flip a property within one year, your profits will be subject to the short-term capital gains tax rate. 

If you are comfortable working with tenants or have a good property manager, you can make more money in the long run with a rental property. You will generate cash flow that can go toward paying off the mortgage and building equity in your home. Some investors decide to convert the fixed property into a rental for a few years before putting it back on the market. Other investors want to hand the property off to their children so their heirs can benefit from step-up basis. 

Flipping or renting is a big decision, but you only get to make that decision if you invest in a worthwhile fixer-upper. Stephan's advice to focus on properties that need cosmetic improvements can save you plenty of headaches. 

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