Buying the worst house in the best suburb

It is a common investment strategy to purchase a fixer-upper in a desirable suburb.

Some may even go so far as to try and find the worst home in the area to ensure the lowest possible purchase price. When adopting this approach, Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa, warns investors to keep a close watch on their spending to ensure a good return on investment.

“The ‘worst’ home in a suburb can come in different forms. The easiest to correct is if the home is simply out-of-date but is otherwise structurally sound and has good bones to work with. But profit margins will grow ever smaller if the home is on a much smaller plot than the rest of the homes, if its floorspace is significantly less, or if the home has a weird layout that will be costly and complicated to correct,” he said.

Think cost

When weighing up whether the home will be a good investment, Goslett suggested finding out the cost per square metre to build in the area compared to the cost per square meter homes in the area have sold for in the past.

“Local building contractors should be able to provide the former figure, and real estate professionals will be able to provide the latter figure for you based on a competitive market analysis,” said Goslett.

Based on these amounts, investors can do the maths and work out whether adding onto the home to make it closer to the size of other homes in the area will be a profitable exercise.

“Investors should remember that structural changes will cost a lot more than cosmetic changes. Before purchasing the property, conduct a thorough inspection to make sure you won’t be met with unexpected costs, like having to replace the roof or having to rewire the home owing to faulty electrical work,.”

Generate value

Investors will also need to spend strategically when bringing the home up to the standard of other properties in the area. Goslett explained that some features will be in high demand and will increase the value of the home more than others.

These features should match the standard of other homes in the area if the investor wants to see good returns. There will be other features that are not as popular where the investor can cut back on costs and find more affordable alternatives.

To maximise the possibility of good returns, Goslett recommended bringing in a local real estate professional from the start.

“Equipped with years of experience in the area and up-to-date with the most current market trends, real-estate professionals will have the best idea of what would generate value in their given market and can help investors avoid the mistake of overcapitalizing and cutting into their returns,” he concluded.