Imagine heading to an open home where the bathroom and kitchen require a renovation and the carpet is worn to the point you can see the floorboards underneath, but you buy it anyway.
Though this idea might have you perplexed, if you ask most real estate agents, buying a house that needs a little (or a lot) of work in an exceptional area is a common practice.
Director at Real Estate Institute of South Australia (REISA) Victor Velgush says whether you’re an investor or an owner-occupier, purchasing a hard-featured property requires attention to detail but, in the end, it can be worthwhile.
“You need to look at the house as a box that you can work on rather than looking at it as something that’s complete,” says Victor.
“Many buyers think if it doesn’t look like a magazine, they think it’s terrible, but the reality is that you have to better discern between what’s key in the rooms – the walls, the foundation and the land – and what is actually changeable.”
The pros and cons in buying a property for its land value differ whether you’re an owner-occupier or an investor, here are the considerations that you should make depending on your situation:
With the real estate market maintaining its head of steam across Adelaide, buying a home in a premium suburb remains out of reach for some homebuyers.
Victor says buying for land value can help achieve property goals for a lower cost even after renovations.
“When you’re buying at the crossover point where the land is worth the same as the house, you’re actually getting the house for free,” says Victor.
“Particularly if you’re somewhat handy, and have weekend projects, you can add value to your own house and create wealth on the weekends.”
Though owner-occupiers will only experience capital appreciation when reselling, future buyers will likely have a greater interest in the property.
Despite this, owner-occupiers need to make considerations about whether they can live through the renovations.
“As an owner-occupier you earn money, pay tax, and what’s left you use to renovate your house, this makes it very financially difficult,” he says.
“In some cases, you’re going through the inconvenience of living during the renovation yourself.
“You could even be living in a house that might have a terrible rusty water coming out, or the toilet backs up and overflows or other [health] risks.”
According to Victor, buying the worst house on the best street is one of the best ways for investors to make a significant profit.
Provided you carry out all the right renovations, Victor says the home will have significant tenant appeal.
The property will also be positively geared as the rent will cover the mortgage and maintenance costs.
“If you’re investing [in land value] then all you have to do is renovate the house to the point it is liveable and is nice and fresh,” says Victor.
However, if you’re an investor with a large portfolio you may want to “set and forget” your property – when buying a property that needs maintenance, this isn’t an easy feat.
Victor also says lower depreciation write-offs can be a downfall as new properties – such as home and land packages – allow the property to be a tax write-off.
“In the first five years of a new property you can depreciate everything,” says Victor.
“If you’re a high-income earner, and you’re paying heaps of tax, the lower depreciation is a negative for you.”