Buying Distressed Investment Properties: Perth Opportunities

Distressed home buying is not for the faint of heart, and it isn’t always recommended for first time home buyers, or even people looking for their first investment properties. Perth does, however, offer some excellent opportunities for picking up distressed properties at a bargain, if you possess the financial constitution to weather the slightly longer time to maturity that the investment usually entails.

What Makes a Property “Distressed”?

A distressed property is a property that is on the market at a value lower than what one would expect for the area, or from a house of its size or quality, due to a number of different reasons. Some of the reasons why a property might be distressed make it ideal as an investment, while some others disqualify houses as investment properties. Perth has massive fluctuation in the affluence of its areas and the desirability of various styles of homes, so it’s well worth knowing which factors you should look for.

Signs of Distress That Make Good Investment Properties

Sometimes a property is distressed, but a trained eye can see that it wouldn’t take much to bring it up to its full potential. Some of these factors include:

  • Unfashionable paint or wallpaper, tile patterns and carpets
  • Old bathrooms or kitchens
  • Being previously occupied by smokers
  • Draughty windows and doors
  • Overgrown or haphazardly designed gardens

Red Flags

Perth has a number of neighbourhoods you definitely don’t want to buy in, as well as lots of homes that will simply cost too much to repair. There are a number of signs of distress that should warn you off certain investment properties:

  • Unsafe electrics
  • Substantial rising damp, which can often indicate that the plumbing needs to be redone
  • Unsound foundations (look for large wall cracks)
  • General neighbourhood distress, which isn’t going to get fixed any time soon (shabby neighbouring properties, the closure of a local business or school, etc.)
  • Flood damage
  • Termites (you have no idea how deep the damage goes)

The Point of Diminishing Returns

With fixer-upper investment properties, Perth is no exception to the rule that there is a point at which you simply won’t make back the money you spend on renovating a property. A “point of diminishing returns” is a well-known term from economics and business that means the point at which pouring more money into a project or investment will yield comparatively smaller and smaller returns, until the investment is eventually not recovered.

There are no hard and fast rules, but as a general rule of thumb it is safe to say that a 10% investment in renovation (on top of the property’s original value) should yield a 20% capital gain in price. Once you go over this magical 10% threshold, you start to see returns struggling to go above 20-25% of the original value, so it stops becoming worth your while, even after you take tax variation into account.

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