Pros and Cons of Buying an Old Property as an Investment
There is a certain allure to buying an old property; a whimsical proposition similar to the charm offered by an antique. There is history within those walls; aged perhaps but rich in character and personality. But beyond the romanticism lies the reality that buying an old home is a decision that has its share of risk and rewards.
Here are the pros and cons of buying an old property:
1. Lower Acquisition Cost
Generally, buying an old home should cost you less compared to a new one. Of course, this is not always the case. While the house itself is a depreciating asset, the land on which it stands is not.
The final cost of the old property would depend on the location, its overall condition and the average selling prices of similar houses within the area.
If you did a comparison, you would find that a modern 3 bedroom house would be priced much higher than an older home with the same number of rooms.
Many older homes were built at a time when the area itself was in its early development stages. They are usually located closer to the commercial and business districts of the city which are key contributing factors to the value of the property.
The home itself could be located within proximity of schools, small shops, supermarkets, banks and public transportation. These amenities not only provide convenience but also generate more interest in the property despite its age.
3. Greater Lot Size
When you’re looking at homes that were put up 20 to 30 years ago, these were built at a time when land was still abundant. Chances are an older home stands on a lot area considerably larger than newer homes.
Architects likewise preferred to design more spacious homes because families back then were larger. Thus, by buying older property you could be acquiring more land which means greater opportunity for creating wealth in the future.
In Australia, new homes are built on smaller lot areas because the supply of available land is not enough to keep up with rising demand. The situation is expected to continue over the next few years given the steady growth of Australia’s population and consistent demand for property from overseas markets particularly China, Taiwan, Singapore and Hong Kong.
Houses develop over time. From the time it is first constructed, it becomes a constant work in progress. Every year, the home goes through incremental stages of improvements. In 20 to 30 years time, the home has achieved full maturity. Barring any immediate repairs or if there is a need for major renovation, with an old property, you can move in almost immediately.
With newer homes, it might take time to move in. You may want to change some details or bring in your own furniture. It is more expensive now to design space according to your wishes than it was 20 to 30 years ago. Today you may even want to maintain the furniture and fixtures of the old home which could add more value to your investment.
5. Established Character
The increasing demand for homes in combination with decreasing supply of property has coerced developers to build up units as fast as possible. Developers may even resort to prefabricated structures or singular designs to have housing available. As a result, you have houses that look alike and with the same amenities.
Old homes are built with more thought and purpose. That’s where you see the classic brick fireplace, sloping ceilings, wooden floorings and beams. There’s a certain air of elegance and sophistication about the place you won’t find in a newer home that could just be a mirror- image of its neighbour.
6. Opportunity to Increase Property Value
The common misconception among first-time buyers is that purchasing old homes results in lower returns owing to diminished value. But the truth is, it gives you an opportunity to increase property value through renovation.
Improvements such as adding bedrooms, providing outdoor amenities, increasing storage facilities, building a garage, introducing carpets and improving windows, curtains and doors all enhance the value of your property.
What you would need to do is determine the right budget for improvement so you do not over-capitalise.
So how should you budget for home renovation? Ideally, you should not spend more on a room or area than its value as a percentage of its overall cost.
Here’s a table showing the approximate value of each room and area assuming the old property was purchased for $500,000:
|Area||Acquisition Cost||% Value||Renovation Cost|
1. Higher Cost of Repairs and Maintenance
An old home has seen its fair share of wear and tear over the years. Its plumbing, electrical and heating systems could be obsolete and may not even comply with current building standards.
Having these improvements done can be quite expensive. There could be changes done at the structural level to ensure stability. But these conditions should be addressed right away because they could pose serious health and safety concerns in the future.
3. Lack of Storage Space
Many older homes did not consider the importance of storage space. You will notice designs of cabinets and drawers were much smaller compared to those of newer homes.
It is not uncommon to find modern homes which utilise every possible area for storage. These areas include under the stairwell, as extensions of furniture or as embedded compartments on walls.
As the house grows old so do the trees that surround it. Not only do branches grown bigger, larger and longer but so do the roots. Eventually, the roots could encroach the foundation and damage the driveway, ground floor area and plumbing systems of the home. A decision to relocate the tree or renovate the home would be very expensive.
4. Unfamiliar Surroundings
A pair of shoes feels more comfortable after it has been broken in. But not when it’s someone else’s shoes. It just doesn’t seem familiar.
It may take some time to get used to unfamiliar surroundings. Or it may not. On the other hand, with a newer home, you get to create your own memories and experiences. It gives you a stronger sense of being “at home”.
The neighbourhood could also have gone through changes the last several years. Families come and go. A new generation takes over. You could be residing in a subdivision with an eclectic mix of personalities.
5. Higher Cost of Insurance
When you buy a house, you should have it covered by insurance. But insuring an old home is much more expensive than a new one.
Insurance companies are aware old homes carry more risk with the possibility of having outdated plumbing and electrical systems which increase the possibility of fire and flooding. They also consider the stability of the old house’s foundation.
These concerns will definitely add up to the total premium you have to pay to keep your home insured.
If you want to mitigate the risks of buying an old property, here are 2 things you should consider.
First, hire a buyer’s agent. Unlike a listing agent, the buyer’s agent represents the interests of the buyer. He or she can provide valuable advice on whether or not you should push through with the purchase of an old property.
Buyers agents have been sellers’ agents before and some have had the privilege of purchasing a property. They can help filter out the multitude of emotions that can overwhelm when going through the process of buying property.
A buyer’s agent is also a crucial ally to have during negotiations. They have years of experience dealing with sellers and buyers. With a buyer’s agent, you are better assured of acquiring the property at a price that falls within your budget.
Second, have an architect and an engineer inspect the home. Ask them to provide you with a summary of works and repairs that need to be done. Discuss the viability of a renovation with the architect and ask for a ballpark estimate. The buyer’s agent can use the summary of works and repairs as a negotiating point with the seller.
Keep in mind that an old property can be renovated to assume a more modernized look. It would depend on your budget and your long-term plans on the property.