How to Use Price per Square Foot as a Property Investment Business Model

In the UK, the most common way to describe the size of a house is by number of bedrooms. In the USA and Europe however, the property’s internal area is the measurement of choice. The trouble with number of bedrooms is that it doesn’t really give a clear representation of property size. Here’s why property investment experts are suggesting that price per square foot is the best property investment business model when it comes to determining profitability.

Thinking about investment potential in terms of the number of bedrooms a property has can have its downsides. The issue is that a large bedroom could have been divided into two, or a reception room converted into a bedroom. This would increase the number of bedrooms, without affecting the size of the property, and therefore its value. In fact, dividing up rooms to create more bedrooms can sometimes even have the opposite effect on property value.

Better then to consider the property’s internal square footage and its associated value, than number of bedrooms as a property investment model? Experts feel that this is the best way to ascertain the true comparative value of an investment property.

How to measure the internal area of a property?

Whilst there is no generally accepted standard for measuring a property, the overall guideline is to include all the internal spaces, including reception rooms, bedrooms, kitchens, bathrooms and hallways and landings. Advice is to exclude any spaces with a ceiling height of less than 1.5 metres, as well as outbuildings, unheated garages or other outside areas.

If you are studying property particulars, you may wish to take them with a pinch of salt, as ‘optimistic’ measuring methods can overstate figures by as much as 10 per cent.

How to calculate price per square foot?

Once you have your internal area, take the asking or sold price of the property and divide it by the area. For example, a 750 square foot house that sold for £150,000 would have a price per square foot of £200 per square foot.

It is important to consider varying factors, however. Location will be a major driver of price per square foot, with values in London generally outpricing those in other areas of the country. Property quality will also play an important role. Anything that has the potential to push up the value of a property will also impact upon its value per square foot.

How to invest using a price per square foot model?

If you are seeking a property investment opportunity that involves adding value through renovation, you could search for a property with a low price per square foot. This could be a property that is in need of modernisation. By renovating, you will increase the square foot value. Extending the property will usually also add value simply by increasing the square footage.

The price per square foot property investment model can also be used to determine whether it would be profitable to split or merge properties. Comparing local price per square foot rates is a much clearer way to ascertain value and potential than the number of bedrooms model.

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