We have all heard the term “white elephant”. Many recognize the term in connection to a holiday game where everyone brings a funny, weird, or generally “unwanted” gift and then, through drawing names, everyone chooses one, trades back and forth, etc. until everyone ends up stuck with a funny or strange item to keep.
The idea behind this game is very directly related to the term “white elephant” when it is used in the course of real estate transactions. It’s an important term for investors to be well aware of and paying attention to.
A real estate white elephant is a feature or aspect of a property for sale that is not particularly desirable. Here are a few examples:
- A spacious home with a 70’s-era wrought iron spiral staircase going to the second floor
- A very nice house that is fronted by a busy 4-lane street with constant traffic flow
- A four-plex that has a busy dog boarding business with outdoor kennels as a next-door neighbor
- A home with power lines or a water tower out front
When considering a property for investment purposes, even when all the checkboxes are ticked – spacious, very nice, good income potential, next big thing neighborhood – it’s wise to ask yourself if YOU would be comfortable with the spiral staircase, busy traffic, noisy and smelly neighbors, or funky bathroom if YOU were living there. Because this is what your potential buyers and/or tenants will be doing.
In the listed examples, as an investor looking to purchase for rental potential or to flip, the staircase could be a costly part of renovation and should be well considered in your budget. The funky avocado green bathroom is just part of the cost or bathroom renovations, and probably not a deal killer. The real problems that aren’t going away are the busy street and the noisy smelly neighbors. Consider carefully if these will affect your investment. Will you still be able to rent apartments easily, to the type of tenants you desire? Will the busy street be a deterrent to first-time buyers with children? Is it just such a pain to get in and out of the driveway that nobody will get past the first showing?
Not every property has a white elephant included. Almost every property has some undesirable feature that should be considered carefully when making your investment buys. Don’t let the desirable features or location be the only ruling factor, as the white elephants can and will affect investment potential.