Bottom end of the market

I like buying investment properties at the bottom end of the market. A step up from slum-lording, but still basic, no-frills housing. Easy to rent, cheap to maintain. Nothing glamourous. Nella and I lived in one of these when we first got married.

I wouldn’t buy something I couldn’t live in. Note that’s “couldn’t” not “wouldn’t”.

Keep an eye on the price gap to the next best type of housing from your tenants perspective. This could be between two-bedroom units and three-bedroom units or two-bedroom houses in the same area. That gap grows and shrinks. As it grows there is normally opportunity for catchup in prices by the cheaper property. As the gap shrinks that means the growth is limited by the larger (more desireable) property.

All renovations at this lower price range are small (if there are no structuraly problems). It doesn’t cost much to fix a small place. But I have seen them overcapitalised, despite that. Marble bathrooms and Italian floor tiles don’t go in those places. Make it nice so the homely tenant doesn’t want to move.

It is possible to take this to an extreme. Some people are amassing large numbers of cheap county houses. Remember that there is a base cost for materials, repairs and rates. So if your positive cashflow county property returns $1,000 net per annum, you are a water heater accident away from breakeven. Nothing wrong with that, so long as you know.

Eventually wealthy real estate investors trade out of residential Single Family Dwellings and into commercial, industrial, or Multi-Family Dwellings. That normally is to ease the management headaches. Until then houses and home units are an affordable training ground for landlords.

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1 Comment

  1. I’m with you 100% on this one. There is another issue too – risk spreading. If you’ve got 5 properties then one or two can be vacant or under renovation and you’re not losing your entire income stream. Similarly, you’re spreading your chance of hitting that mega growth suburb (albeit from a smaller base)…but then a little bit of something big is always better than a whole lotta nothing!

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