05/12/2012

Question: I’ve been studying growth patterns in Melbourne suburbs and have identified what I think is a market that is going to have good capital growth. Rents are good too, and on some of the cheaper properties I’ve calculated that positive cash flow is a possibility.

The problem is that these cheaper properties are, well, yuck. I know you’re supposed to look at them through the eyes of a prospective tenant, but I grew up in a blue collar suburb just like the one I am looking at and I can’t imagine many people would want to live in some of the houses I’ve been seeing.

I’ve read investment advisers saying that I’m wrong and that I’d be surprised who would be willing to rent certain properties, but surely there is a line? I want to buy cheap, but isn’t there a limit to how seedy you can go?

Answer: First of all, well done for taking the first step and researching the combination of capital growth and cash flow. My strategy has always been a combination of both. Cash flow will allow the property to pay for itself, without you having to use your own ‘hard earned’ cash. Capital growth will give you future equity to use for deposits on further investments.

Generally, the best returns will be with these cheaper properties. As a landlord, you would be required to provide a rental property that is completely maintained and ‘livable’. Tenants have different rental budgets and requirements. Although you may not want to live next to a service station in a small, old 1950’s home on a tiny block of land, maybe the part time service station assistant would feel this is perfect.

The other benefit of buying that ‘yuck’ investment is the likelihood of manufacturing capital growth immediately by simple upgrades. This would then bring better rental returns, also making your next investment property purchase easier too, since your income (rent) and wealth (capital growth) have increased. 

These upgrades could be as simple as painting the front of the house, weeding and pruning the front yard, or adding a front fence to give your unsightly property better street appeal. The only cheap properties that I would not consider (after researching the area and rental market) would be properties with structural issues. Appearance, on the other hand, can be changed with a bit of imagination.

  • Answer provided by Prue Muirhead, Investor of the Year 2009