Henry Washington:
Most investors are looking for red flags in properties, but I’m looking for green flags that everyone else is missing. Here’s what happens. You see a house listed for $250,000, but it’s sitting on the market because the numbers don’t pencil. But if you know what to look for, you’ll see that that house is actually worth $350,000 with just a little bit of work. I’m going to show you the six green flags that let you spot these opportunities before anyone else does. Finding these undervalued properties isn’t about getting lucky or having some off-market deal source. It’s about knowing what to look for that turns off ordinary home buyers and even scares away most investors. The best deals I’ve ever done have all had at least one of these green flags hiding in plain sight. You don’t need expensive marketing systems or special connections. You just need to know what to look for.
It is always important for you to have your looking goggles on and what we’re looking for are opportunities to add value by doing little or minimal work. So it’s how can we add max value without having to spend max dollars? That’s the lens I’m looking through when I’m looking for some of these green flags that properties have. All right. The first green flag I want to talk about is looking for homes with opportunities to add additional bedrooms. And the caveat is to add those additional bedrooms under the current roofing structure, meaning I don’t want to have to build out addition to add a bedroom, but just make some minor changes within the current structure and add to the bedroom and bathroom count. Back in the day, people used to love a formal living room and a formal dining room. Those spaces are not currently leveraged by the modern family.
And so you can put on your value glasses and try to find homes that have some of these spaces that are now obsolete and convert them to what families now want, which is additional bedrooms. So how do you find these opportunities? What I look for specifically in listings is I am looking for houses that have a larger square footage number than what the bedroom and bathroom count would suggest. In other words, if I see a two bed, one bath home, but it’s got 1,500 to 1,800 square feet, that tells me that that house probably has some additional spaces that are not being used as bedrooms that I may be able to make some small tweaks to and create additional bedrooms. Other things to look for are there laundry rooms that are the typical size of a small bedroom? I’ve purchased several homes that have had massive laundry rooms even in what would be considered a lower price point or first time home buyer home.
And so I have been able to successfully repurpose large laundry rooms into bedroom space. All that typically requires is moving the laundry to somewhere else in the house, maybe a closet in a hallway, maybe there’s a bonus room or something where you can add some laundry space. The other two spaces, one, I talked about formal living rooms, but there’s also formal dining rooms. These spaces were popular in the 50s, 60s, and 70s, but now aren’t popular. And what I love about them is it’s fairly easy to convert them to bedrooms because they usually already have a window. And we all know that in order for a space and a home to be considered a bedroom, it needs two things. It needs an egress window and it needs a closet. So sometimes you’re able to just simply close in a doorway, put a regular door instead of an opening and then build out a reasonable sized closet in that room.
And for less than five grand, you’ve now created a bedroom space that is going to increase your rent that you’re getting by two to $400 a month depending on the market that you’re in. That small investment pays you back in a very short period of time and then you get to keep putting that additional cash flow in your pocket once your investment’s paid back. All right. The next green flag to look for is of a similar vein. This time we’re looking for houses with opportunity to add bathrooms. Houses that have more bathrooms tend to be more desirable, both when you’re selling the property or when you’re renting the property. One of the most important factors I look for in homes that I can add a bathroom to are seeing homes that don’t have a true primary suite. In other words, none of the bedrooms have direct private bathroom access to their own bathroom.
This is a feature everybody wants. Everyone wants at least one bedroom with its own private bathroom. People will buy homes that don’t have this setup, but it may take you a whole lot longer to sell it or it may take you a little bit more time to rent it because this is a convenience that people expect in a home. And so if I can find a home that doesn’t have it, it usually means I can buy that home for a decent price and then force the value by adding the bedroom. But there’s another thing you want to think about when looking for these situations. Not only do I want the house not to have its own primary bathroom, but I want the house to be on a crawl space. Why on a crawlspace? Because if the home is on a crawl space, it’s much easier to add plumbing under the house because there’s no concrete you have to drill through.
You literally just need to get a plumber under the house and they can move the plumbing to the parts of the house that you need the plumbing to be at in order to add the bathroom. And what does that do? It makes the cost of adding that bathroom substantially less expensive than if it’s a house that’s on a concrete slab. So if you’re going to look for quick opportunities, I always look for no primary suite and on a crawl space. And a bonus third thing to look for when you’re searching for opportunities to add bathrooms is se if the main hall bath for this property that doesn’t have a true primary is a large bathroom. Most modern homes are split floor plans now, meaning the primary suite is on one side of the house and the rest of the bedroom and bathrooms are on the other side of the house.
But in the 50s, 60s and 70s, all the bedrooms typically were at the end of a hallway and there was a bathroom somewhere in the middle. A lot of the times there is room to create space to add a doorway from one of the bedrooms into that bathroom and to create a true primary suite by splitting that bathroom from one to two. Next up, I’m going to tell you how to spot an opportunity to add more square footage to a property without making expensive structural changes. But first, we’ve got to take a quick break.
All right we are back on the BiggerPockets podcast. Let’s jump into green flag number three. The next green flag I want to talk about is one of my favorites and that is simply finding homes that you can easily add square footage to. In other words, that square footage is already under roof. I don’t have to do anything structural. It already exists there, but it’s missing one particular component and that component is it doesn’t have air conditioning. If it is not a heated and cooled space, then that space cannot officially be counted in the heated and cooled square footage of a home and homes are valued based on their heated and cooled square footage. So if you can take a space that exists and make one simple change, usually it’s just adding an AC register off of the already ducted AC in the house. You can now create heated and cooled square footage where it didn’t exist before.
So how do you find these opportunities? Well, that’s a little more difficult because usually when you’re browsing listings online, you can’t just tell if a room is heated and cooled unless you can see the registers in the pictures. But even if you can’t, it doesn’t mean that they don’t exist. It just means you can’t see them in the picture. So this is going to require a little more legwork. You’re either going to have to go look at these houses yourself and have your eyes open to find these things or ask questions of the listing agent or have your agent ask questions of the listing agent to find those details out for you so that you understand that you’re walking into an opportunity that has some potential value. Well, what kinds of rooms are under roof that are not heated and cooled? Most of the time I have found that these are sunrooms or reading rooms that are typically on the back of a house.
Maybe that house had a porch at one point and a previous owner enclosed that porch but never heated and cooled it. So now you have an opportunity to heat and cool that space so that you can count it as additional square footage. I would say 95% of the homes that we have found that have this same situation to add value, they have all been sunrooms or reading rooms, or they call them Florida rooms in different parts of the country. The other 5% of the time it’s just been like I’ve converted laundry rooms that weren’t heated and cooled, or I’ve converted garage space and maybe an oversized or weird garage into heated and cooled square footage. Another caveat to remember in this is if it is a sunroom, it’s typically going to have exterior walls. So it’s not just that you have to add HVAC. You also will need to add insulation to those exterior walls so that the room feels and operates truly like an internal room.
You don’t want to have a heated and cooled space that doesn’t have insulated walls. A, you’ll get tagged on the inspection when you go to sell the property or B, your tenants will complain because they can never keep that room cool enough or hot enough and they’ll run their electricity bills through the roof. So typically what I do with these spaces is I still leave them as their intended purpose. So it still stays a sunroom. It’s just now heated and cooled square footage. I rarely take sunrooms and make them bedrooms just because they’re cool features of a house that people enjoy. People still use sunrooms. It’s not like green flag number one where we were converting obsolete rooms. This is not an obsolete room. Sunrooms are rooms people enjoy. So I leave the functionality, I just make it more comfortable for people and more valuable for me.
Look, of all the green flags I’m talking about, this is the one that I have executed the most and has worked successfully pretty much every time. So keep your eyes out for this one. All right. The next green flag to look for are homes that have unfinished basements with separate private access. Why are homes with unfinished basements that have separate private access important? The main reason is that having separate private acces means I have the potential to finish out that space and leverage it as its own unit. This is important, frankly, because BiggerPockets has done a great job telling people how amazing house hacking is and now there are couples and families and investors all over the country who want to house hack. And in my market, duplexes that househackers want tend to sell for substantially more than just a single family home. So you can add value and create desirability by being able to turn a single family into what is essentially a multifamily.
Again, there are several things to consider here. It is not as easy as I’m just saying. Just convert the space. You’re going to have to pull permits. You’re going to have to make sure plumbing can fit where you want it to. You’re going to have to make sure that the basement structure is sound enough to support what you’re trying to do in that space. And most importantly, you want to make sure that the basement is tall enough to be comfortable for someone to live in and that there are egress windows for people to get out of in the event of an emergency. All those boxes will typically be checked during the permit process, but knowing what to look for allows you to give your agent some search criteria or for you to have some search criteria to put into Zillow, Redfin or Realtor wherever you’re searching for homes so that you can identify those opportunities and then you can go do the due diligence to see if you can actually execute on those opportunities.
Yes, this is probably one of the more expensive green flags that are on here, but it is also one of the most profitable green flags that we’re talking about because of the immense value that you’re adding to the property. So if you think you found one of these spaces and you’re trying to figure out what your next steps should be, the first thing I would do is contact the city, specifically the zoning department, and find out if the house is currently zoned to allow you to add a second unit legally. If the property is not zoned appropriately, the next question to ask is, how much will it cost and what will it take to apply to change the zoning? The answer may be you can’t do anything or the answer may be here’s a series of steps, but if the property is appropriately zoned already, that is one less barrier that is in your way to be able to add that value.
That would be step number one. Step number two is you’re going to need to get a contractor in there and get some bids on what it would actually cost to do this. So you need to engage a contractor to get the answer to what it’s going to cost and you need to engage your agent to understand what that property would be valued at after you add the updates. I have more green flags you need to be looking for on your next property and we’ll get right to those after the break.
We are back on the BiggerPockets podcast talking about green flags you should be looking for. Let’s dive back in. All right, this next green flag is one of my favorites. This is a strategy that we’ve probably executed on the second most amount of times and that is identifying properties that have potential to give you additional land. Get this typically for free. So how do we do this? We specifically look for homes where the owner owns two lots right next to each other or where the lot for the home is abnormally large, large enough that the city may allow you to split that lot. So how we look for these things is we dial in our search criteria and we specifically look for large lots or we specifically look for where the seller owns the lot next door. A lot of the times sellers will sell this all as one and not even realize that the two parcels are parceled separately.
That’s the best case scenario because then you don’t have to go split the lot yourself. But in a lot of scenarios, what we’ve done is we’ve purchased homes that have an unusually large lot and as part of the due diligence process, you can call the city and ask if they will allow you to split the lot because then you’re getting a sense of, can I create the value prior to you purchasing the property? The caveat with this guys is to make sure that you can make your profit on the deal without you having to monetize the additional lot. In other words, I will never buy a house to flip because it has an additional lot or because I can split the lot. If it requires me to flip the house and to sell the lot in order for the deal to be profitable, I only do this strategy if all I do is flip the house and I do nothing with the additional lot, I have already made my money.
That’s how you ensure that you truly get the land for free and that you’re buying a profitable deal to protect yourself because what you don’t want to do is end up with a piece of land and then find out that the city won’t let you develop it or find out that you can’t zone it appropriately to do what you want to do and now you’ve got this piece of land and you’ve got debt on it, but you can’t monetize it. Things like this happen all the time. So you truly want the land to come to you at no cost so that you can monetize it. And if you can’t monetize it, you can sell it for pennies and it won’t hurt you. Now we know how to look for these additional lots and we know if we can have those lots split to add the value, but what do you do with it once you own it?
Well, that’s the best part is you can do what you want. I have monetized land in multiple ways. The most common way we monetize the land is to just sell the land. I would say 70% of the time when we flipped a house and got an additional lot, we have sold that additional lot to the buyer of the house. So they paid me the value I wanted for the house and then they paid some additional to get that lot so that they can use it for themselves, build on it for themselves or just keep it as land for themselves to have a bigger lot. But in some instances, like one instance I have right now, I have a vacant lot that I kept from a house that I flipped and we are developing a new construction home on it. So I’m going to build a property and then I’ll sell that property.
So I’m going to do my first ground up construction and I was able to get the land for free. One thing you can also do, which is probably my favorite way to do this is I sold a vacant lot on owner financing. They gave me a four or $5,000 down payment and they made monthly payments to me over the course of five years. And so I turned a property that I paid nothing for into a check on day one and then cashflow for the next five years by owner financing that land because I owned it free and clear. All right, that was a lot so far, but we’ve got one more, but don’t worry, I’ll make it brief. This is one that everyone should be looking for and are probably one of the easier ones to look out for. And that is looking for properties where the rents are priced under market value.
I know this sounds super easy. Why would this be out there? No one’s going to find this. This is all over the place. There are landlords all over the country who are selling their properties who probably haven’t kept up with yearly rent raises. And so you’re able to identify some of these opportunities and then make offers on those properties where you know, “Hey, all I have to do is get fresh tenants in here who are willing to pay market rents and now I can make more money from this property. Now this property pencils and is cash flowing, or maybe I only need to do a light renovation and I can increase rents drastically.” Not every landlord was a good operator and kept up with the rents. So if you can identify properties where rents aren’t at the market value and you can see where you can increase rents without having to spend a ton of capital to do so, you have found an opportunity to create cashflow.
So how do you look for these situations? Again, this is one that’s going to take a little extra work. So I would say start with your buy box. Don’t just buy anything because there’s this opportunity. Make sure these deals are within your buy box. And if you’ve got properties in your buy box that are rentals, ask your agent to find out what the rents are. And then if you don’t know what market rents are to know if the rents that that property is receiving can be raised, you need to either have your agent pull rent comps to give you something to compare it to or speak to local property managers and ask them what this property should rent for if you were to give them this property to manage. Property managers get calls like this all the time. It is perfectly okay to call a property manager and say, “Hey, I’m looking at purchasing 123 Main Street.” It’s saying rents are about A, B and C.
Are you seeing that as what market rents are or is there room to go up based on what you’re seeing in the market right now? And that will give you what the true rents are so you can make the comparison and understand if this is truly an opportunity for you to increase value by increasing rents. So there you go. If you can find opportunity to increase rent, you find opportunity to increase cashflow, more opportunities, pencil, and you’re actually finding deals that make sense in this current real estate market. All right folks, those are our green flags. I hope this was valuable to you. I hope you took some notes and are going to start executing, putting on your search and goggles and finding these opportunities that are hiding in plain sight and starting to build wealth by increasing value. If you found this helpful, go ahead and give us a like.
Leave a comment down below. Did I miss any other green flags that you like? We’d love to hear what some of you are out there doing to add value to the properties or how you’re finding opportunities to purchase. As always, thank you so much for listening to the BiggerPockets Podcast. We’ll see you on the next episode.