A classic recommendation in property investment is to buy the worst house on the best street. While the reasoning behind this approach is sound—prioritising location over dwelling quality—there are important considerations to be made before making this decision.
The media loves a rags-to-riches story
Countless articles and television shows, such as The Block, showcase success stories of ordinary individuals who generate significant profits through renovations. While these narratives are compelling, the financial reality of buying, renovating, and selling can be far more complex than the publicised success stories suggest.
To truly assess whether this strategy is viable, let’s explore the financial and logistical factors involved.
Financing an unliveable property
Some buyers deliberately seek properties that require major renovations or even demolition, hoping to secure a bargain due to the property’s poor condition. While this can be a strategic move, it presents financing challenges.
If a property is deemed uninhabitable, securing a standard mortgage is unlikely. Traditional lenders often require the property to be in a liveable condition before approving finance. In such cases, buyers must seek a construction loan, which comes with stricter lending criteria and requires the renovation to be carried out by a registered builder rather than as an owner-builder.
Acquisition costs to consider
Purchasing property comes with additional costs beyond the sale price. These include stamp duty (land tax), legal and conveyancing fees, mortgage registration, building and pest inspections, title registration, and potentially Lenders Mortgage Insurance (LMI) depending on the loan-to-value ratio (LVR).
For example, in Victoria, purchasing a $900,000 property will incur approximately $51,500 in extra fees and taxes, significantly impacting overall affordability.
The cost of demolition
If a property requires demolition, expenses can vary based on factors such as access, hazardous materials (e.g., asbestos), and the extent of the teardown. A full demolition typically costs between $12,000 and $40,000, translating to around $40–$65 per square metre. Partial demolitions may reduce costs, but it’s crucial to obtain quotes in advance to ensure feasibility.
Time is money
Beyond direct costs, time delays can significantly impact the viability of a renovation or rebuild. If the property is not your principal place of residence and remains uninhabited, additional holding costs and taxes may accrue.
One of the biggest sources of delay is obtaining council approvals. Depending on location and applicable overlays—such as heritage restrictions in areas like Stonnington—planning permissions can take anywhere from 3 to 12 months (or longer in extreme cases), further increasing holding costs and potential risks.
Renovation vs. rebuild
In many cases, buying the worst house on the best street is more suited to renovation rather than a complete knockdown and rebuild. Renovation projects can range from minor cosmetic updates (e.g., repainting and landscaping) to major structural overhauls, such as kitchen and bathroom upgrades, extensions, or even reconfiguring the internal layout.
Renovations can be a cost-effective way to increase a property’s value while retaining its original character. However, it’s crucial to factor in renovation costs, potential hidden issues (such as outdated wiring or plumbing), and the time required to complete the work.
A complete rebuild can provide the opportunity to construct a modern home tailored to specific needs. Often new builds are in fact cheaper overall as they offer a clean slate. There’s no need to take into consideration the legacy structure however they don’t retain the emotional and classic appeal of a heritage facade.
Buyers must weigh up whether the additional investment in a rebuild will deliver returns that justify the effort and expense.
Ultimately, the decision between renovation and rebuild should be based on a thorough cost-benefit analysis, factoring in the property’s condition, market demand, and long-term financial goals.
What else is an option?
While purchasing the worst house on the best street can be a profitable strategy in the right circumstances, it is not a guaranteed path to success. Buyers must carefully assess the costs, financing challenges, potential delays, and market conditions before committing to such a project.
Don’t forget, buying something turnkey in the same street will likely result in a similar financial outlay, less stressful process and a home to live in.
A well-researched approach that considers both the financial and logistical aspects will ensure that any renovation or rebuild aligns with long-term investment goals rather than becoming an expensive misstep.