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Reproduced with permission.
Over the next few weeks, I will be detailing my “Golden Rules for House Hunting”. This is one of the most popular sessions with students as they are simple to follow and can help you make money and/or avoid costly mistakes.
Golden Rule #1 – Buy the worst house in the best street
This is a very common saying in real estate but have you ever stopped to think why this is supposed to be a great capital growth strategy?
To help me explain this, imagine you have the opportunity to buy one of the following four houses:
• Best house in the best street
• Worst house in the worst street
• Best house in the worst street
• Worst house in the best street
Best house in the best street – This might be a great home as you are in the best location and have a grand house but there has probably been a lot of money spent on the building, fixtures and fittings, which have been built into the selling price and are all quickly depreciating in value.
Worst house in the worst street – Other than probably being a magnet for the “tenants from hell” what is going to drive the price up of this property. If it is the lowest quality house, surrounded by other low quality homes, located in between a factory and electricity substation, across the road from a 24 hour service station, where’s the appeal! Why would the next person pay you a premium for this place? You can spend all the money you want but it will always be located in between a factory and electricity substation, andacross the road from a 24 hour service station.
Best house in the worst street – Unfortunately it is all the other houses in the street that keep the price of your property down. You will have to wait for the whole street to improve and be upgraded before you will see much capital growth.
Worst house in the best street – In this scenario, you have the potential for capital growth as it is the surrounding houses and streetscape that can boost your value, once you have improved your property. It will only take a small upgrade, in particular externally, and the property instantly becomes much more appealing as it is more like the surrounding properties.
The analogy I like to use is making a comparison to a sports person and their team:
• Best player in the best team – You’ll pay a premium for them but how much longer will they be able to play for?
• Worst player in the worst team – Can’t see them improving and moving up the premiership ladder.
• Best player in the worst team – In a team sport, it takes more than one player to make a marked improvement. The other team members can often bring down the elite players performance.
• Worst player in the best team – This (probably young) player has plenty of opportunity to improve as they are surrounded by high quality players.
This first golden rule highlights how important location is to a property’s potential. As you cannot change where a property is located, you’d better make sure you get this right!
Happy House Hunting!
Written by Peter Koulizos, university lecturer, author and buyers advocate.