The pros and cons of knock-down, re-build properties for investors

A battered old house falling down at the seams and being offered for a rock-bottom price can look incredibly tempting to an investor. But while knocking it down and rebuilding can prove enormously profitable, it’s an opportunity that comes with important caveats.

“Firstly, are you an active or passive investor?” asks Empower Wealth buyers’ agent Bryce Holdaway, the co-host of The Property Couch podcast. “If the answer is passive, walk away.”

“Secondly, are you experienced in the property industry? If not, you, too, should walk away. This isn’t the time to cut your teeth when building companies are so vulnerable, timelines are blowing out, and the cost of materials is so high. But if you’re active, experienced, and have the skills to turn apples into apple pie, then you could make a lot of money.”

A bag of apples, Holdaway reasons, could cost $5, and the sale of an apple pie could reap $25. That’s only, of course, if buyers are after apple pie – you have to do all the usual checks to make sure you’re knocking down and rebuilding in a location where there’s demand, and where you won’t be over-capitalising.

There needs to be purchasers around who are after a much better-quality home, and willing to pay for it. “In those cases, 100 per cent it can be a good idea to buy an old home and demolish it and replace it with a better one,” he says.

“But you also need to make sure you factor in the cost of your time, the uncertainty, the risks and the emotional costs of doing it all.”

At knockdown-rebuild specialists Kurmond Homes, managing director Peter Kulakovski says they can definitely be excellent investments and he far prefers them over complete new builds, particularly in greenfield areas.

“Buying an old house you’re going to knock down means you can still earn rental income on it while you’re waiting for the plans to be drawn up and all the authority permissions,” he says. “It’ll be the same price as you’d pay for the land, but it can help pay the mortgage while you’re getting ready to build.

“Location is obviously always important and sometimes on the greenfield sites you’re waiting for the infrastructure, while knockdown rebuilds are usually on infill sites in areas that already have bus stops and rail stations and shops and schools and medical centres.”

As well as the uplift in the capital value from the new home, there’ll also be a much higher rent you can charge for a brand new quality home that takes its place, he says.

In addition, adding value by renovating homes can be time-consuming and labour-intensive as compared to building from scratch, says Drew Glascott, general manager of sales Victoria for builders Metricon.

“Choosing to knock down and rebuild allows you to avoid expenses [including] stamp duty, buying and selling costs, and the unpredictable costs of renovations, which often arise from hidden issues in older homes,” he says. “When you compare renovation costs per square metre, knockdown-rebuild often comes out as the more cost-effective option.”