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Buy Ugly Ducklings

By taking on properties that others turn their noses up at, you can avoid competition and focus on adding value, writes Nick Gentle.

By: Nick Gentle

1 December 2019

I visited a property recently with a would-be investor friend who was looking for a property to buy, renovate and then sell – a “trade” in this case, but the same idea applies to buy-and-hold rentals.

The deal we checked lacked a certain aesthetic charm… Well, any charm really. The paint was a weird beige colour, some of the boards had chipped, the driveway was a gravel mess, the paving stones were uneven and the deck might have been salvageable on a good day. That was before we went inside.

The investor was completely turned off, meanwhile I was excitedly pointing out all the ways the house would scare away potential buyers and that there was a great opportunity, because none of the renovation work seemed to be structural or particularly heavy.

In the end my investor friend decided not to bid. The property was up for auction, so a friend and I had a crack at it instead. Unfortunately we came second place that day, it happens sometimes, however as a trade property I could see about $40,000-$50,000 profit for a relatively straight-forward renovation in a good area, to make an “ugly” house look great again.

The Ugly Strategy

Buy “ugly”; the “worst” house on the best street; find problems you can solve; look for upside; and add value. You will hear some variation on this theme over and over again in property investment circles – and for good reason. These are the tried and true paths that many have trodden to property investment success.

‘The value was going to be a good amount more than my total spend, and cashflow looked good so I pulled the trigger’

You see, in the end everything with investment is just a number. Purchase price is a number, your interest rate is a number, the time to sell, cost to sell, renovation cost, end value – all numbers.

If you get the numbers right then you will do well, if you get them wrong or ignore them then you could run into trouble or keep missing out on good deals.

The same rule applies to buy-and-hold investments, of course. One of my best purchases was a very old deceased estate villa with problems (commonly described by agents as “character”). The interior hadn’t been updated in half a generation and the exterior was in disrepair. It needed a new everything, which is what it got. I had a builder visit the property and cost out an internal remodel and full cosmetic fit-out as well as the external repairs.

This deal happened to have structural issues so we added a hefty contingency to that. On top of that I worked out (which is code for asked a professional to tell me) design costs, council costs, holding costs for a renovation and the rest. At the same time I confirmed the future rental appraisal and expected value of the finished product. The value was going to be a good amount more than my total spend, and cashflow looked good so I pulled the trigger.

Professional investors, buy-and-hold buyers and traders don’t shy away from unattractive properties with problems, they look for them and then
trust their team to help them make the deal work.

It can be intimidating to take on a project for the first time, so if you find yourself spooked by this idea then I would encourage you to speak with investors and professionals who have already done these types of deals and can guide you through it. Your local property investors’ association is a great place to meet with other investors, or you could work with a mentor or a property finder to help you put a couple of deals together until it becomes second nature to see past what a property is and visualise what it will become.

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