Cost guidelines for p/t renovators

[dynamite]

Hello all

We are a pair of renovators whom have decided to take our interest a step further to make some money.

Our aim is 10-20% profit by:

buying for 80% less than market value, spending 5-10% of market on renos and selling for 110% of market. Give or take some percentages

We aim to stay around the bayside areas, hopefully to remain in CGrowth areas, which helps when it comes time to sell if the market turns for the worst.

Is this a good general plan to start with?

We have done renos without trying to make profit, but have done ok so far (50k profit off 200k), but I think this is largely due to the inflated market and I dont think that we should expect this kinda money when the market isnt so good for selling.

Also where can we get a worksheet with cost and project guidelines? ie something that has all the necessary fields that we can write the appropriate costs next to.

PS: this is the best flaming forum for renos I can find, wicked !

 

[beech]

hi Dynamite welcome to the forum.
With all related costs including buying,reno,selling and capital gains tax you most likely need a lot of luck as well as a great reno to have made any money.

There are alot of people on this forum that do renos but keep the property,get a new valuation and use the gains to do it all again.

I suggest you spend a good deal of time reading this forum for ideas in regards to your plan.

And your right this forum is magnificent for everything property.

Darren

 

[dynamite]

Thanks beech, thats my first reply.

Your right about the buy and hold strategy thats going on around the country at the moment.

But if you can flip for a profit, then I reckon thats the way to go, if not fall back to the hold. (sounds like cards).

 

[XBenX]

interesting POV - but why flip ?

especially if youve bought in K growth areas as you've mentioned

(I do think flipping has its place though... but only where you can either buy at under "market" value or add value and you dont think the property represents a good long term investment)

why not save on the CGT and other associated costs of selling - keep the property which is a good K growth prospect and have released the same amount of funds as you would have realised by flipping

buy and hold is hardly "going around the country atm" its not as if its a fad....

 

[Aceyducey]

Dynamite,

Applaud your sentiment & as we do this for a living I can say that it works provided you are willing to really put the time in to do a good & fast job.

Some comments on your 'mission':

Buy at 80% / sell at 110% of market value - do you mean market value for similar houses in the suburb or do you mean list price for the individual property being bought?

Remember that whatever a house sells for is it's market value, so effectively you can only buy a house at it's personal market value.

Renovations of 5-10% - good target though we go a little higher to 15% (inc contingency) as we find that the return justifies it

'when it comes time to sell if the market turns for the worst' - why sell? Keep the property, refinance to get as much cash out as possible, put in some tenants & hold.

10-20% profit - A good rule of thumb is to aim to get $3-5 for every $1 invested in the renovation. This can help judge whether a property is worth renovating....in some areas fully renovated properties do not deliver the premium required to justify renovation - ie no profit.

EG: Unrenovated property bought for $200K, renovated properties selling for $240K. If you spend 10% on renovation, the following applies:

Purchase: $200
Buy costs: $10
Renovation costs: $20
Holding costs: $3 (say holding for three months from settlement to sale)
Sales costs: $8
TOTAL INVEST: $241

Sale price: $245 (wow - got above market!)
NET PROFIT: $4

Not worth it


If possible try to get renovation access after exchange - this cuts your holding costs.


I'd suggest that you create your own worksheet that is customised for precisely what you are doing - that way you'll also understand it better.

After a few times you can put in a few formulas based on wall/ceiling/floor areas & auto-calc costs like carpeting, tiling & painting

We tend to buy some to flip, some to hold - remember you can only make cash from sales (no servicing debt), but lose the long-term capital growth....Essentially, can you get a higher return by taking profit from sales and reinvesting in your reno/sale business or by holding properties long-term and taking cap gains.

If properties are at least neutrally geared and we can refinance to take out more cash than we put in, they are essentially 'free' properties. You get cap gains AND you still get to use the cash for the next place.

Cheers,

Aceyducey

 

[dynamite]

Good points everyone especially Aceyducey.

I was looking at market value of area, but your right, market value is a per house thing.

For me the flipping thing really depends on the market, if you can get a massive profit quick and move onto the next place with that cash, your compunding your investment. However if you can only get a deposit profit then, I think holding is the best option.

At least it seems to me Im somewhat on the right track.

If I was to start my worksheet with some must have fields, any idea what they would be? (I do but I want to see other peoples ideas).

Thanks everyone !

 

[XBenX]

if you make a massive quick profit why not keep it....the new cost of the property or whatever you would sell it for is now the new bae on which capital growth will compound on

the point is if its a good long term investment keep it - you dont need to sell to realise a profit ?

i really dont understand the flick strategy where it is a good growth prospect...

the only time I see it being useful is when you need to pull 100% of your capital for the next project when in reality if you need $X you can probably borrow $X (after you take selling fees etc etc into account

where you have a better long term growth prospect then I can see the reason to flick (due to opportunity costs)

 

[Ruby]

I'm not really sure how helpful this would be for renovators, but might be worth checking out.

If you don't mind giving your email address that is

http://www.thehousehunt.com.au/index2.html

Ruby

 

[Rick]

Excellent thread guys,

We recently interviewed Michael Pettett (aka TheGrocer) who owns over 200 properties and he really hit home for me.

He said "people need to stop trying to make the most profit from every deal, and make the right profit for every deal, flipping is all about volume. No-one ever made it big doing 1 or 2 deals"

He says the key is if you are buying a house for 150k that is worth 200k, flip it for 180k instead of 200. That way you are leaving enough in it for the next person and you can sell 10 of them a week, every week.

 

[dynamite]

Originally posted by XBenX
the point is if its a good long term investment keep it - you dont need to sell to realise a profit ?

Good points, I think some of the reasons people flip are below

*you don't have the risk of your proerty decreasing in value (this is not to common an occurence but does happen)
*there is no risk of tenants devaluing the property as to lose the profits you have made with the reno
*there is no risk of depreciation
*you do not have to get to a point of being over captilised (the point where the lenders wont lend because your income doesnt cover the worst case scenario)
*you are able to control your own level of compounding profit as its not dependant on the market
*no loss of income on negatively geared property

Can anyone else think of any?

In saying all this there are obviouslly negatives to flipping.

In my case I actually need to consolidate some debt, so I will likely use equity in my current house and just keep hold of it.

 

[Aceyducey]

A few other reasons to flip:

The property is not in an area with a good capital growth history (bought to renovated and resell)

You get to take out 100% of the equity in the property not just 80-90% - useful for funding other deals both through the extra 10% cash & additional servicability

There is a emotionally driven buyer who is prepared to pay well above the market to own such a beautiful home (take the cash and buy the 'average' house next door for $100K less)

The property's location/characteristics do not fit within your buy & hold strategy guidelines (follow your own rules!)

Cheers,

Aceyducey

 

[dynamite]

aceyducey the 100% equity point is a big one in my opinion.

 

[XBenX]

thanks guys - its probably a good point to add the stupid buyer paying over market value as you suggested

didnt think of that.. yet it was the reason for us just selling our PPOR to an unsolicited offer.

Originally posted by XBenX
if you make a massive quick profit why not keep it....the new cost of the property or whatever you would sell it for is now the new bae on which capital growth will compound on

the point is if its a good long term investment keep it - you dont need to sell to realise a profit ?

i really dont understand the flick strategy where it is a good growth prospect...

the only time I see it being useful is when you need to pull 100% of your capital for the next project when in reality if you need $X you can probably borrow $X (after you take selling fees etc etc into account

where you have a better long term growth prospect then I can see the reason to flick (due to opportunity costs)