Buy, reno sell. Put/Call option?

[Aimjoy]

Hi guys,

Here is my dilema and I am hoping some of you might be able to offer me a guide.

I have 5 IPs now (all of them houses with granny flats - so 2 lots of rental income from each) and have reached the limit of both serviceability and coming up with more deposit money for further purchases. When I started the process in 2001, I was doing buy, reno, revalue to draw down some of the equity created to use as a deposit on the next property. Now of course (I am on the Central Coast of NSW - 80kms north of Sydney) since 2003 the market has basically come off a bit & flat-lined.

Here's an example of the last transaction I did:
Bought a double storey house (it is setup as a 3 brm house upstairs and a 1 brm flat downstairs.
Purchase price 1/6/06 $200K
Purchase transaction costs $8K
Reno over 3 months $20K
Total costs to 1/9/06 $228K
Conservative sworn Bank Valuation $230K
Sale value probably $245K (minimum - based own research & 4 real estate agent opinions who I respect)
If I were to sell at $245K
R/E Commissions at 2.2% = $5.4K
Other closing costs say $1.6K
Profit from the deal = $10K and this does not include holding costs for the reno period and the selling / settlement period.
Potentially all the profit (equity created would be eaten up in transaction costs - the 10K would just vanish)

OK - so this is one reason we don't sell - I understand that. The equity gets to stay in the IP and grows over time.

So I'm happy for the time being with my 5 IPs - maybe I'll buy some more down the track. But I would like to do buy, reno, sells to other investors who do not want the hassle of the reno. Just hand them a pre-packaged IP - all done. I believe there is a market there for this type of product - i.e. where I have sourced, researched, negotiated well, renovated properly and then maybe even got tenants in.

In the above example I have a rental return of $170 pw for the house and $130 pw for the flat = $300 pw...on a property valued at $230K - so the returns are attractive.

But how do I turn a profit from the deal - if it is all burned in transaction costs? Do I use a put/call option? I have researched the threads on put/calls and am none the wiser - at least so far. Remember I'm in NSW.

Any ideas?
Thanks.

 

[Qlds007]

A Put /Call Option will not help you unless:

1) The vendor allows you to access the property and renovate it prior to exercising the Call.
2) You have sufficinet cash or equity funds to enable you to undertake the work.

All a P & C does is give you time up your sleeve to enable you to either flip the property, change the nominated purchaser or indeed add value and flip it.

In some States Stamp Duty is payable upon the Call however i do not believe this is the case yet in NSW.

We utilise P & C's for development deals in Qld all the time as they give us flexibility and time.

Another alternative would be to look to the Vendor to provide some financing which may aid your deposit issues however will not avoid the in and out costs or your servicing problem.

 

[Aimjoy]

A Put /Call Option will not help you unless:

1) The vendor allows you to access the property and renovate it prior to exercising the Call.

I was hoping to be able to negotiate this. I figured it may not be too much of an issue in a flat or slightly falling market. Worst case scenario for the vendor is a renovated property.

2) You have sufficinet cash or equity funds to enable you to undertake the work.

I can handle this OK

In some States Stamp Duty is payable upon the Call however i do not believe this is the case yet in NSW.

I have a suspicion that if used in conjunction with a put, then there is Duty payable - in NSW - but I will stand corrected if this isn't the case.

My strategy was simply to remove a layer of transaction cost to make the deal profitable - otherwise I can't see how it will be profitable.

Also I have no idea why a put has to be involved. Can you explain?
Cheers.
Aimjoy

 

[kiwi]

Hey there,
There ar4e a couple of ways you can do this and get some funds building up along the way.

You can do a sandwich lease option and pre-advertise a handyman special before you get a lease option to get a potential handyman buyers list and then charge an option fee or an equity partner agreement with the handyman on the final sale price.

EG you get a lease option for say 300K for 5 years $1.00 down

You have a builder that is keen to make some money and you team up with him/her and go 50/50 split on the nett sale price .... that way you do not have to pay for the renovations and you get he work done for free + get 50% of the profits.....
An add that says something like..... (just off the top of my head)
CALLING ALL BUILDERS!
I need an investment partner.
You supply labour and hardware
I supply house and we split the returns
200% return on your investment gauranteed.
call ...... for more information.
You'll Kick yourself is you miss this!