A question regarding the condition of property when purchasing for capital growth

Discussion in 'Investment Strategy' started by Alf83, 30th Jun, 2023.

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  1. Alf83

    Alf83 Well-Known Member

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    Firstly, I apologize if my question appears inexperienced as I am relatively new to the investment property market.

    I want to buy an investment property with the primary goal of capital growth in mind. I would like to buy a bigger land in case I have enough money to subdivide and build it in a few years. So, I'm looking at land sizes above 700 sqm at the moment. However, I would just sell it as it is, or renovate and sell it if I cannot afford subdivision and building new units.

    Now, I'm wondering if it would be a mistake to purchase a property in good or very good condition to generate more rental income during the period between purchase and sale. The reason I'm asking is because it seems there's a strong idea that it's better to buy a property that needs renovation, but when I look at the renovated property prices vs the ones that need to be renovated, I don't see how I can renovate those and make a profit?!

    For example, I recently saw a property for $880k which is in very good condition. Same size properties with poorer condition in that suburb go for around $800k. Shouldn't I buy the one with better condition? In other words, how much the gap should be between a property with poor condition vs one with good condition to justify buying the poorer one? I know this is a relative question, and it depends on the property, but please consider following scenario:
    Two 4-bedroom properties with similar land and building size in the same suburb, one with good condition listed for $880k, and the other with poorer condition listed for $800k. Recently renovated properties in this suburb are sold for around $1 million dollars. Which one would you buy?

    Your suggestions are welcome and appreciated.
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    Are you good at renovations? Good at design?

    Not all renovations are profitable.
     
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  3. Burramys

    Burramys Well-Known Member

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    All my properties have needed TLC to varying degrees. I look for structurally sound properties that need renovating. Structurally sound means that it will not fall down, useful in my view. A property that needs a reno will sell for a lower price, hence lower stamp duty and rates. My PPOR had a number of obvious reno items (and some I missed), so I used these to get a lower price than advertised. I was able to quantify how much the renovations would cost and how long they would take, so advising the selling agent, to my advantage. One reno took a lot longer and cost a lot more than anticipated, but the rental income was good and there was a big capital gain when I sold. Do the maths. Looking at the long-term impact is useful.

    That said, Jess has good advice - not all renovations are profitable.

    On balance I suggest that the property cited above for $800,000 is better if the structure is sound. I have gained access before settlement to measure and set up jobs so that renovations start the day after settlement.
     
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  4. Ruby Tuesday

    Ruby Tuesday Well-Known Member

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    Every time I considered buying for Reno I went and took a cold shower and new build gave better value and cash flow, especially when stamp duty was taken into account as the one that needed reno wasnt much cheaper after stamp duty. With a new build the stamp duty was negligible on the land and none on the house which also gave building allowance and on going depreciation tax benefits. The last 3 years have been an exception to before that, as you can now buy better good conditon properties for less than you can build inferior ones and I suspect renovate too. Build costs have gone up about 20% just in the last couple of months and may keep going up despite the noise about unemployment labour shortages are a major issue. I certainly wouldnt dismiss buying a good condition house they may give you better quality tenants, when tenants move into a new house they tend to want to keep it looking like new. An old house can get just as much rent, the condition of a house doesnt make much difference to gross rent, but a new house can have much better net rent with less expenses and tax refunds. Most of the properties I bought were never advertised some where from sales with settlement failure, advertised price means nothing offer what works and is viable. What should determine what you buy is whether viable price is accepted.
     
    Last edited: 1st Jul, 2023
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  5. Burramys

    Burramys Well-Known Member

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    Ruby, that's a good point about costs going up, and it may alter the maths somewhat. Also, the shortage of tradies and companies going bust are other factors. There's no right or wrong. Look at all the issues, look at different views, do the maths very carefully, and select the option that suits. Some places I've bought could not be lived in unless there was a reno. All my renos have been to a high standard, so while the outside may look dated, the inside is very nice. I could make a comment about this IP and PPOR model being like me, but I won't.
     
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  6. Beano

    Beano Well-Known Member

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    My two cents experience if I could turn the clock back to 1972 when I brought my first property.
    Best option:Buy lessor's interest.

    Next best :Buy land that could be leased/or leased, spend almost nothing on the property, hold forever. Eg yards.

    Next best: industrial buildings on net leases. Spend almost nothing.

    I have spent millions on renovations only to have to do it again in a decade or two while my land base properties increase in value without the $$$$s.:eek:


    My favorites are the properties that need no TLC ....and have no buildings on them :)
     
    Last edited: 1st Jul, 2023
  7. Alf83

    Alf83 Well-Known Member

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    Nice! But would you be able to get a mortgage for land? I guess you need to spend your own cash to buy land.
     
  8. Beano

    Beano Well-Known Member

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    Banks are happy to lend on land with income.
     
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  9. igor1234

    igor1234 Well-Known Member

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    Buy an island :)
     
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  10. igor1234

    igor1234 Well-Known Member

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    if u can service a loan u will get the $. the Q is only at what rate.
     
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  11. Beano

    Beano Well-Known Member

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    I would be happy just owning Hong Kong island :D
     
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  12. Beano

    Beano Well-Known Member

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    The answer to the question is net rental over twice the cost of funding from the bank. Hence the importance of rental growth.

    If the interest rate goes back up to 24% pa I use to pay in the 80's then yes it will be difficult to service debt:(
     
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  13. Lindsay_W

    Lindsay_W Well-Known Member

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    It's lender dependent, buying vacant land with no intention to build rules out some lenders entirely while others will restrict the LVR so a larger deposit may be required.
    Zoning comes in to play too, you can't typically buy resi land then use it as a 'yard' to generate an income.
     
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  14. Beano

    Beano Well-Known Member

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    Some land have commercial buildings on , some houses , some flats others run businesses on them eg Scaffolding , moving companies .
    Both residential and commercial land can be leased.
    Something like this land
    https://www.domain.com.au/news/live-for-the-moment-20110408-1d6j2/
    would be nice to own .

    Just today a Real Estate Agent informed me of a land with a Woolworths supermarket on that is to be marketed for sale.
    Woolworths own the building!
    You could own the land!


    Banks are happy to lend on land with income.
    Beano, Yesterday at 3:38 AM
     

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