Can you spot a diamond in the rough? When a house in is poor condition, it’s not always easy to tell a money pit from a cash cow. Here are the top tips from real estate experts on how to identify houses with the potential to increase your equity dramatically.
Buy the worst house on the best street
It’s a cliché, but it really does hold true. Because the land on the best street is highly prized, even the worst house can be excellent buying. Having the best house on the worst street means your home’s value is limited by the values of the properties around it.
“Ask yourself: What do the neighbouring houses look like? What is the location doing?” asks Chris Kennedy, CEO at Harcourts. “Is it the best house in the worst street? That’s not going to be the best choice. You’re better off with the worst house in the best street; you need to think about the surroundings.”
SEE ALSO: Pay off the mortgage or buy a rental?
Buy in areas where money’s being spent
Suburbs improve rapidly when the population is increasing and the local council is spending money on infrastructure and projects in that area. Avoid areas where schools are being closed – look instead for places that are earmarked for new amenities. Get on your local council’s website, and the NZTA, to find out where the dollars are heading.
“It pays to check out what’s happening in a location because city boundaries shift quickly during expansion,” says Kennedy. “Growth tends to move to the north-west as cities chase the sun, so if you can buy on the edge of a boundary it will eventually move.”
Buy a dated, dirty or smelly property
Try to look past horrible furnishings, pet smells and grubby rooms to see the potential underneath. Many buyers are so put off by ugliness and odours that they won’t give a house serious consideration. This means you have fewer competitors and you may be able to negotiate a better price.
“If budget’s an issue look for poor carpets and houses needing painting,” says Ashley Church, chief executive at the Property Institute. “New paint and carpet are cheap – a fraction of what it will cost to buy a better home. You can add that value at little cost. These are all opportunities for you.”
A few years ago Kennedy purchased a house in Christchurch from an elderly couple who hadn’t updated the property since they had bought it 12 years earlier. He binned all the nets and old curtains, shampooed the carpets and painted throughout in Double Black White and put up readymade curtains from Briscoes. Having spent only a few thousand dollars, the property was transformed.
“One of the problems for people is they don’t have the ability to envision what a property can be,” so if you have that foresight you can buy advantageously, he says.
Buy a property with a strange layout
Can you rearrange a house’s internal non-load-bearing walls to create superior spaces? Older homes often fail to use light and space in modern ways, but if you’re savvy enough to spot an opportunity to take out a wall or swap around rooms, you can make an old house feel new again.
“To reconfigure a house is relatively cheap,” says Church.
Buy more land rather than more house
To maximise your gains, remember that houses themselves don’t gain much value – it’s the land that’s appreciating. Houses require a lot of expensive maintenance, while the land just keeps gaining value; this is one important reason that leasehold properties are relatively cheap. Given the choice between a smarter house and a bigger section in the same location, you’re best bet for building your wealth is the larger section.
“Land is your biggest factor,” says Church. “If you buy something subdividable, even if you don’t want to do anything with it, when you get closer to retirement you have a nest egg plan to execute when the time is right. In Auckland you can subdivide for about $150,000 and the land will be worth about $800,000 – that’s like free money. The economics aren’t as good the further south you get but it’s worth doing the numbers on it.”
Buying strategically helps you move up the property ladder
Savvy homeowners can build equity and use their buying skills to leverage into smarter houses and more desirable suburbs. Local markets have their own features to focus on: for instance, adding off-street parking is particularly valuable in Dunedin, while fencing a property pays off especially well in Rotorua. When you know what the market wants, you can look for properties that let you add in the right features.
Kennedy purchased his first home in Invercargill in 1986, despite the fact it was in a flood zone and he was strongly advised not to buy it. It cost just $43,000 and he sold it 18 months later after some cosmetic renovation for $56,000. From there he bought a home for $90,000, modernised it, and sold it for $150,000. He bought another run-down house for $90,000, and did it again and again as a way to build up his financial position.
“Buying well enables you to build equity and move forward. It doesn’t matter whether you buy today or in two years’ time – the value of property has shown over time to increase. There are highs and lows but if you’re in it for the long haul, go for it.”
SEE ALSO: Pay off the mortgage or buy a rental?