How to Ensure Your Investment Property is a Bargain, Not a Lemon

There’s a fine line between snapping up an investment property bargain and buying a lemon. If a property is selling cheap, there’s usually a pretty good reason why. Sadly, some things really are too good to be true, and it’s not always obvious to the inexperienced eye. This can be a costly trap for rookie homebuyers or someone buying their first investment property. So how do you spot the difference between a bargain and a lemon? Here’s the lowdown on how to avoid any nasty surprises that leave a long-lasting bitter taste.

Recognise red flags

There are definitely warning signs to lookout for when you think you may have found a bargain. Oftentimes, one or multiple factors can indicate a property has problems, such as:

• Length of time on the market
• Impossible to inspect
• Poor building quality
• Development next door
• Missing maintenance
• Dampness
• No internal photos
• Tricky contracts
• Non-compliant building work
• Limited natural light

Don’t be afraid to ask lots of questions if you are suspicious a property has something to hide.

 Know what can and can’t be fixed

Some problems are bigger than others. However, in some cases, a property that needs a little work can actually increase the value of your investment. Generally speaking, here’s how to know the difference:

What you can fix:

• Minor noise (with insulation and double glazing)
• Interior design
• Configuration of rooms (turning a study into a bedroom or vice versa)
• Storage
• Natural lighting in a house (add a skylight, windows or glass doors)
• Under-cover parking for a house (add a car port)
• Landscaping

What you can’t fix:

• Location
• Land zoning and covenants
• Land size
• Traffic
• Infrastructure that imposes on your property (e.g. power poles)
• Flight paths
• Aspect (which way the property faces)
• Natural lighting in a unit (you won’t be allowed to add windows)
• Unit block exterior (although you can try and influence the body corporate)

In saying that, some lemons can still make lemonade, and the juice is worth the squeeze. The danger here is that some investors try to compensate on what can’t be fixed by over-capitalising on what can. It’s also worth noting that just because something can be fixed, doesn’t mean it should. For example, a property with structural damage is certainly fixable, but the associated costs could far outweigh the gains. If you decide to purchase an investment property with obvious drawbacks, be sure to research which renovations offer the best ROI.

Research the area

It’s not necessarily about price; it’s about getting the most bang for your buck. Therefore, opting for something cheaper may not be in your best long-term investment interests. Stretching the budget for a slightly more expensive property in a quality area with higher growth potential could be a smarter option. Do your homework, not just on the property, but the location. Research the average price of similar properties in the area, and what they have that yours doesn’t, or vice versa. Also, beware of suburbs labelled the ‘next big thing’. Where there’s a boom, there can also be a bust. Towns that thrive on the mining economy are a perfect example of this.

Crunch your numbers and compromise

It’s important you know what your financial limits are and work within that budget. If you’re buying a fixer-upper, factor in the cost of renovating the property to market standards and know your deal-breakers. You should begin your investment property search only when you’ve considered all the corners you’re prepared to cut and the sacrifices you’re willing to make.

Get expert advice

Spotting a bargain from a lemon sometimes requires an expert eye. Before you sign the dotted line, seek professional advice from a property or building inspector. An experienced inspector can give you accurate information on the extent of any defects in your property of interest, as well as ballpark repair costs.

On a final note, not all cheap properties are lemons. Reasons for under-pricing can be because the owner’s need an urgent sale or the property is part of a deceased estate. However, savvy investors are always on the hunt for genuine bargains and often snap them up quick. So the more prior research you do, the better chance you’ll have of avoiding a costly mistake.

 

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