Many people ask us whether it is better to buy a house that is fresh and ready to rent out — or — a distressed property in needs of renovation.
It is a very relevant question especially in the beginning of a property journey. When I was starting out I faced exactly the same dilemma.
There is no definite answer to this question. Let me go through pros and cons of both fresh and distressed property. Let’s look at such criteria as costs, financing options, returns, risks and maintenance.
Fresh and ready to go property
Buying a BTL (Buy To Let) — a house for rental purposes is a tempting idea. You can choose between already exiting flat or house and off-plan property (sometimes called BTR — Build To Rent). Since you will be buying on the same market as people buying their homes these properties typically are available ‘on the market value’. That also means that there are less chances of buying them with a discount. If you buy off-plan in a bigger volume you might be able to negotiate the price but for a smaller investor this rather out of reach.
The flip side of this though are good financing options. Typical BTL mortgage products require a property to be habitable. Of course a clean and tidy house is habitable can be put on the market without any (or at least major) refurbishment. Therefore there is a chance you will be able to purchase a property with 25% equity. Then the rest will be paid by the lender. That is a big advantage, especially if your investing pot is rather small.
When it comes to returns market value causes you leave more money in the deal and that leads to a lower ROI (Return on Investment, check our previous articles).
What about risks?
The strong argument for buying a property in a good shape is avoiding risk of refurbishment. If you are an international investor (like us) and you cannot overlook works on your site you risk delays and increase in costs (of course mitigate that risk by having a good project manager). As we wrote in our previous article – increase in costs or prolonged refurbishment affects your ROI. It can also cause a massive headache. No wonder why so many people chooses to go for a fresh and ready to go property.
Another argument for buying a clean and tidy property is low risk of repairs and easier maintenance (at least in the beginning). If you buy off-plan you might also benefit from discounts on insurance.
Tomorrow we will look at pros and cons of buying property in need of repairs or conversion.
Co-Founder of Momentum Property Education