Buy, renovate then sell? Does it work?

[Dave Hooper]

Is anyone here pursuing a strategy involving purchasing 'renovators delights', doing an appropriate renovation, then selling?

Do the higher costs involved (stamp duty at purchase, agents at sale) prevent this strategy from working?

If you are a developer or an investor, do you use this method? Is there not enough depreciation built in to make it work?

Any tips on this topic will be appreciated greatly.

 

[Aimjoy]

Hi Dave,

Read this thread: http://www.somersoft.com/forums/showthread.php?t=38744

Then do the sums. Here's a hypothetical example:

Buy $200K house (in need of reno)
Spend $20K on reno (keep it at 10% or less than the purchase price)
New val = $240K ( you get $2 back in val for each $1 you spend, if you do it right and maybe more)
Profit of $20K is eaten away ENTIRELY by - Stamp duty, 3 months holding costs to buy, reno, sell, REA comms, etc) and that is if it all goes to plan....which renos often don't.

Best option is to buy, reno, refinance the created equity out and hold forever.
Refinancing at least gets you 80% of your $20K back in cash (less some holding costs) and repeat process again and again.....not tax, no commish.

Even people like Michael Yardney say they have not sold any of their developments for a very long time - it is just too expensive.

The kind of buy, reno and sell thing to make money only happens in a part of the cycle where there is upward movement on prices which we saw in 2003 > 2005 and you saw in MEL a little bit last year as well. The sums still work as per the example above but while you are doing the reno the market is still moving upwards and so you make money doing it (you think it was your fantastic reno but it was the market too).

IMHO this is not the part of the cycle that this strategy works well. In this part of the cycle you make money by finding distressed vendors, making low ball offers, taking up a few who say yes and then holding till the market improves in a couple of years - then refinance the equity out of it and off you go again.

Just my 2c.

Aimjoy

 

[fernfurn]

Is stamp duty payable in Qld

 

[evand]

And hope like hell the market doesnt go backward (even a little bit) while you are renovating. All your work and expenses for nothing. Even possibly leaving you with a net loss.

There is a huge oversupply of property for sale at the moment and an under supply of buyers (according to APM). Adding one more renovated house to the list doesn't make sense.

Its a good chance the RBA could increase interest rates once or twice in the course of one reno with disastrous consequences.

And thats just one risk of many. The risk reward equation of renovating at the moment is so out of balance its not funny. Proceed with extreme caution.

Profit of $20K is eaten away ENTIRELY by - Stamp duty, 3 months holding costs to buy, reno, sell, REA comms, etc) and that is if it all goes to plan....which renos often don't.

 

[jsj]

Is stamp duty payable in Qld
Celia, Yes stamp duty is payable in Queensland and it gets worse, you pay a higher rate if purchasing for investment. As an example, on a $300k purchase of investment property, $8975 would be charged in Stamp duty.
There needs to be a good margin to make renovations worthwhile when you add costs of the reno, holding, agents fees, legals, advertising and capital gains tax on sale.
I like where the big jobs have been done and only the prettying up and presentation is needed to achieve a better sale price. Sometimes a tenanted property on under market rent is worth buying and rejuvenating at the end of the lease. A few skips, a couple of weeks of elbow grease and a bit of paint can work wonders.

 

[PrimeCommercial]

Yes it can and it does work.
Relatives of mine have been doing this for the last 15 years and although there have been better times than others they have always done well.
Their strategy has been to live in the property whilst renovating it.
They are empty nesters (or nearly, as one keeps coming back) but he is a carpenter by trade and she is an interior designer and two of their kids are builders. They do this on a fulltime basis so apart from the little odd jobs for friends and the month long holidays overseas, renovating is a their full time job.

It takes them 12 months between purchasing and selling and they have it down to a fine art.

As with all short term property investing the key is to buy well. They also do a very good job on renovating, I know of at least 3 of their houses that have been featured in those glossy home magazines.

The houses they have bought have always been in nice areas and been in the $600k-$1m purchase price and have been in some cases not fit to live in.

Their reno's have never been the 'wack on a bit of paint and tidy up the garden' type, its the 'gut the entire place and start from scratch' reno's but thats the specialty and their very good at it.

The last 3 that they have done I would have sworn they would not have made a cent because of a stagnant market but the finished product always looks a million bucks and usually they get more than that.

So the basics for them-
Its a PPOR so no CGT payable
They own the property outright so no huge holding costs
They do most of the work themselves.
Buy very well and do an exceptional job renovating.
Net anywhere from 20%-40%

 

[feihong]

Yes it can and it does work.
Relatives of mine have been doing this for the last 15 years and although there have been better times than others they have always done well.
Their strategy has been to live in the property whilst renovating it.
They are empty nesters (or nearly, as one keeps coming back) but he is a carpenter by trade and she is an interior designer and two of their kids are builders. They do this on a fulltime basis so apart from the little odd jobs for friends and the month long holidays overseas, renovating is a their full time job.

It takes them 12 months between purchasing and selling and they have it down to a fine art.

As with all short term property investing the key is to buy well. They also do a very good job on renovating, I know of at least 3 of their houses that have been featured in those glossy home magazines.

The houses they have bought have always been in nice areas and been in the $600k-$1m purchase price and have been in some cases not fit to live in.

Their reno's have never been the 'wack on a bit of paint and tidy up the garden' type, its the 'gut the entire place and start from scratch' reno's but thats the specialty and their very good at it.

The last 3 that they have done I would have sworn they would not have made a cent because of a stagnant market but the finished product always looks a million bucks and usually they get more than that.

So the basics for them-
Its a PPOR so no CGT payable
They own the property outright so no huge holding costs
They do most of the work themselves.
Buy very well and do an exceptional job renovating.
Net anywhere from 20%-40%

I have heard similar story before.. Basically, the first one is extremely risky, as most ppl don't have cash and have to borrow a lot, so you either make it or break it. Once you pass the first test, difficulty level goes downhill as buying properties outright with cash reduces holding cost to minimal as you have pointed out.

 

[Waverlybay]

Yes it does work. I have been doing this for a few years.
Here are examples of real deals that have been done:

a)Dec 07 purchased for 110k. Spent 40k. Resold april 2008 for $290k
b) Feb 08 purchased 120k. Will spend around 40k. Should sell for around $280k based on comparables
c) Sept 07 purchased for 160k. Renovated for 55k. On market now for $355k. Should get min $345k.
d) sept 07 purchased for 110k. reno $30k. Resold for $225k dec 07.

So can be done ! Reno kings do it all the time. The key is purchasing cheap. IOcassionally i refinance but there are deals which i earmark specifically at the outset as trading stock

wb

 

[RPI]

Hi Shady
I wouldn't like to be them though if an audit from the ATO comes their way. It sounds to me like what they are doing would be classified as a business. I am not an accountant so don't take my word for it but my accountanted informed me I could do that sort of thing once or twice before I would have to pay tax as it would be considered a business not myPPOR.

 

[kristaje]

Hi Waverlybay,

Well done with the reno!
What kind of reno did you do to those property to get such a high increase in price on reasonable budget?

Thanks, kristaje

 

[crc_error]

So can be done ! Reno kings do it all the time. The key is purchasing cheap. IOcassionally i refinance but there are deals which i earmark specifically at the outset as trading stock

wb

sounds like you have admitted the profit is made from buying cheap, not in the renovation.

 

[ffc1883_1996]

I reckon buy-renovate-refinance-hold would be “plan A”.

However, if you needed to sell in order to move forward and take on the next project, then buy-renovate-sell would be an appropriate fall-back position.

 

[crc_error]

I reckon buy-renovate-refinance-hold would be “plan A”.

However, if you needed to sell in order to move forward and take on the next project, then buy-renovate-sell would be an appropriate fall-back position.

problem with the sell part triggers costs. you loose your $20k stamp duty, and loose another $10-15k in agent fees.. and pay CGT

 

[stumunro]

renovating is a great way to build up some equity to draw back out but realising gains by selling it cuts too much of the profit away for my liking

 

[evand]

hi wb

Could you give an outline of your expenses versus built in profit.

Percentages are fine. eg:

Costs @ 100% minus:

5% buying costs
10% holding costs
12% reno cost
4% selling cost
30% CGT cost

selling profit @ 130$

leaves net profit of ?%.

or you can use dollars if you like.

Yes it does work. I have been doing this for a few years.
Here are examples of real deals that have been done:

a)Dec 07 purchased for 110k. Spent 40k. Resold april 2008 for $290k
b) Feb 08 purchased 120k. Will spend around 40k. Should sell for around $280k based on comparables
c) Sept 07 purchased for 160k. Renovated for 55k. On market now for $355k. Should get min $345k.
d) sept 07 purchased for 110k. reno $30k. Resold for $225k dec 07.

So can be done ! Reno kings do it all the time. The key is purchasing cheap. IOcassionally i refinance but there are deals which i earmark specifically at the outset as trading stock

wb

 

[ffc1883_1996]

problem with the sell part triggers costs. you loose your $20k stamp duty, and loose another $10-15k in agent fees.. and pay CGT

Yes of course. That’s why I said buy-renovate-refinance-hold would be “plan A”. But if you’re finding profitable opportunities like Waverlybay, then selling SOME of your projects could be worthwhile if that’s what is needed to move forward.

 

[ffc1883_1996]

sounds like you have admitted the profit is made from buying cheap, not in the renovation.

Perhaps the profit is made from buying well, adding value and NOT overcapitalizing.

 

[crc_error]

renovating is a great way to build up some equity to draw back out but realising gains by selling it cuts too much of the profit away for my liking

it will also increase rent... so yes I agree with improving existing IP's, but the selling part is no good!

 

[dash11]

Hi All

I think the buy and sell method is good only if you are tipping in some proceeds to properties you hold as well.
We bought and sold 14 (I think) last year and are on our 5th for this year. The proceeds are put back into our "hold" portfolio to reduce debt and the rest is used for living. Our exit stratigey is to refinance if it doesn't sell (which to date has not happened) or to refinance if we think it will be a long selling period.
The bottom line is you make your money when you buy and the reno is there to value add and make the sale easier.
We tend to concentrate on the cheaper houses in and around Sydney and then aim them at the first home buyer. We don't make alot of nett profit so its based on turnover for us and as I said, if 1 doesn't sell, we know we have a good house to add to the portfolio which will command a high rent.
If I knew how to put pictures up, I would show the one we just completed. It was on the market for 10 minutes and sold at full price and due to settle in a few weeks.

 

[PrimeCommercial]

We bought and sold 14 (I think) last year and are on our 5th for this year. ......

We tend to concentrate on the cheaper houses in and around Sydney and then aim them at the first home buyer.

Wow, can I assume that you don't do the renovating yourself? Thats an aweful lot of work renovating 14 houses. Well done. Averaging 1 every 3-4 weeks.

Where abouts in Sydney do you concentrate on?
Again I have to assume that you dont do massive renovations to these places.

Definately not strategy you find every day, so I would be interested in more details.

Cheers