Buying the Worst House in the Best Area

In Ireland, home ownership is a significant driver of wealth generation. Whether this is a good thing or not is a debate for another day, but it underscores the importance of the home you buy and the property decisions you make—they can have a major impact on your financial outcomes later in life.

One of the key financial benefits of home ownership is that you don’t pay any tax on gains from selling your family home. So, whether you plan to stay in your home forever or use a starter home as a stepping stone to your dream house, the decisions you make are crucial.

But why do people say, “Buy the worst house in the best neighborhood”? Let’s break it down with an example and some data.

Here's a graph of house prices (in Price per SqM) in 2023 in Cabra. All the houses are in the same neighborhood, with the same transport links, schools, and other unchangeable factors. The graph shows price per square meter (PPSM), with the difference between expensive and cheap likely reflecting the “quality” of the houses.

Ideally, you want the PPSM of the home you buy to increase—preferably faster than the market average. Otherwise, the homes you might move into later could appreciate just as much as your current home, leaving you in a similar financial position.

There are two main forces that can drive up the PPSM of your home. One is largely out of your control, and the other is something you can influence.

External Factors: The Market

The first force is general price increases in your area, which can be driven by several factors:

• Low Supply, High Demand: A growing population and a housing crisis can push prices up.
• Neighborhood Renewal/Gentrification: Some areas go through a transformation where they suddenly become trendy. These areas often have good characteristics on paper (location, transport links, etc.) but suffer from a bad reputation that eventually turns around. Think of Phibsborough or Stoneybatter in their pre-gentrification days.
• Infrastructure Development: New transport links and denser accommodation can lead to more amenities and businesses, making an area more attractive to buyers.

As the saying goes, “A rising tide lifts all ships,” so all areas will likely experience some increase in PPSM. However, some areas will rise faster than others. This is why it’s crucial to put a lot of thought into the area before you buy. You want to ensure you’re buying in the best possible location for your budget—one that not only works with your personal circumstances but also has strong financial potential. This is the rationale behind the advice to buy in the best area you can afford. “Best” can mean the most expensive, but it can also mean the most promising area that shows signs of outpacing others in the next 7-14 years.

Internal Factors: The House

Now, let’s talk about buying the worst house. What does that mean? The idea is that a house that’s a bit rough around the edges often comes with a discount, and here’s the key: you can change the house.

Quick note: When we say “worst,” we’re talking about aspects you can change. You don’t want the “worst” aspects of the house to be things that are difficult or impossible to change, like structural issues, problematic planning permissions, or limitations due to size, access, or position (e.g., end of terrace versus mid-terrace).

Instead, focus on things like aesthetics, layout, natural light, dampness, or dated features. These are all issues you can address. You can add windows, renovate, and modernize the house, moving it from the left side of that price graph to the right.

This kind of work can feel daunting, but if you take it on, the rewards can be substantial—often far outweighing any savings you might achieve through other means.

Combining the Factors: Maximizing Your Investment

All these factors—general market trends, neighborhood improvement, and your own renovations—can stack on top of each other. Imagine a rising tide of property prices across the country, combined with an improving area (shifting the entire price chart to the right), and your house moving from the lower end of the graph to the higher end.

I like to think of this as one of those moving walkways at the airport—where multiple speeds add together, making it feel like you’re gliding effortlessly from point A to point B.

A Comparison: Worst House vs. Best House

Let’s contrast buying the worst house in the best area with buying the best house in the same area. If the market is efficient, the best house is probably also the most expensive, meaning it’s already on the far right side of our price distribution graph.

There’s a ceiling on how much you can increase your home’s value by investing in it, and that ceiling is somewhat set by the area. Buyers, agents, and banks will look at comparable sales to justify a valuation. If the high end in your area is houses selling for €6,500 per square meter, it’s going to be tough to sell your house for €9,000 per square meter—even if it has every bell and whistle imaginable.

This is why you want to have as much “headway” as possible between the PPSM you’re buying at and the highest in the area. That gap is your opportunity for growth. The closer you get to that ceiling, the harder it becomes to get a positive return on investment (ROI) for your home improvements.

A Word of Caution

A lot of people convince themselves that they’re building equity by pouring money into their home, but this isn’t necessarily true if your home is already on the right side of the graph. You’d likely be better off investing that money elsewhere, as you may not see a return on investment. For example, spending €50k on a new bathroom in a €1.6M home in an area where that’s already an extremely high price probably won’t move the needle much. It’s fine if you really want a new bathroom, but be careful not to tell yourself the comforting narrative that you’re building equity when the ROI might be minimal.