Market trends.

[Michael Croft]

Hi all,

Yes the market is slowing - nothing new there - but I have noticed that the houses that are selling for top dollar and fast are those that are fully renovated. The emphasis is on the word fullyand at top dollar!

This doesn't apply so much to reno/holders but to reno/resellers. All mod electrical gadgets, new kitchens, bathrooms, floor coverings, light fittings, landscaping, rendering etc. etc. The places look like they are straight out of Belle or Vogue with price tags for both reno and sale (and poor yields) to match.

No money to be made in the holding but more the unloading. An example of one that I advised on at aquisition stage:

purchase march 2003 $310k (incl s/duty)
reno $55k (not including his labour)
sale price (sold today) $442k
gross profit approx $77k

potential rental return $390 - 410 pw

The guy did this one part time whilst holding done a full time job, so his net after legals, agents and taxes (cap gain) will be about $50k. Not brilliant but considering he earns less than $35k pa not too bad either for 7 months work (and his first time too).

Regards, MC

 

[Gill Bates]

i'm confused, i thought if u sold within 12 months, ( 7 months here ) cap gains tax is 50% ( the highest marginal rate )

So
Sale price - purchasePrice - RenoCosts = Gross Profit before tax
=442k -310k -55k = 77k as supplied

So would not he get about 38k after paying 77k x .5 cap gains tax ?

I also thought that after 12 months the gross profit is added to ur other income and is hence taxed at your marginal rate. Maybe I'm missing something?

 

[Michael Croft]

Hi GB,

You're right on both counts; I'll double check the aquisition date and figures with John and get back to you.

regards, MC

 

[TheBacon]

Not 100% sure but I thought he'd pay tax at HIS top rate, i.e. at $35k he'd pay 30% tax. So 30% tax on his $77k = $23.1k

After tax profit = $53.9k

However this does not factor in his holding costs.
Assuming 20% deposit, loan = $248k
Interest for 7months at 6% is approx $8680.

This reduces his profit. So new profit = $77,000- $8,680 = $68,320

After tax (30%) = $47,824

Still not bad for 7months work.

TheBacon.

 

[Les]

G'day The Bacon,

Not 100% sure but I thought he'd pay tax at HIS top rate

I think you're right - AFTER the gain is added to his income. So, (if what I believe is correct...) add $77k (less costs) to his wage of $35k ....... And I think he is automatically into TOP MARGINAL RATE (i.e. 48.5%)

That could hurt. I hope I'm wrong !!!!! Any takers??

Regards,

 

[abcdiamond]

Originally posted by Les
So, (if what I believe is correct...) add $77k (less costs) to his wage of $35k ....... And I think he is automatically into TOP MARGINAL RATE (i.e. 48.5%)

That could hurt. I hope I'm wrong !!!!! Any takers??

Regards,

Les
Thats how I have read it aswell. Your income for the year is normal income plus any gains.
Therefore hitting top tax rate.

 

[Michael Croft]

Hi all,

Having spoken at length to John ot appears to be a little more complicated than I posted above, I made some incorrect assumptions

I introduced him to the concept of renos early last year and he thought that he would try one and see how it went. Anyway he has latched on big time and has fallen in love with property/renos. He has turned his first effort into what he plans to be an ongoing business; formed a company (sole director) and registered for GST etc. By his calculations and by doing only 2 - 4 "good" renos (upmarket) a year, he will comfortably earn a six figure income working about 6 months of the year.

To cut a long story short the figures above are not relevant to his situation which has evolved into something more than when I last spoke with him some months ago. So only the aquisition, reno and sale price/costs should be used to work out eventual profit.

If you are extrapellating this or any other reno to your own situation the net profitability will obviously vary (if it's not obvious do more reading in the taxation section of the forum) depending on your individual/ corporate/ trust structure(s) and consequent potential taxation minimisation.

I am sure John will make a go of it and do well; my parting words of advice to him were "it's not how many you reno, but how many you get to keep that counts". He plans to keep one a year for the first 5 years then two a year for the following five then 4 a year for the following five. My (educated) guess is he will do a lot more than that!

Regards, MC

Oh yeah, the point of the thread was to pass on some big picture stuff to those that are interested. Full 'upmarket' renos appears to be what the market is demanding at the moment; so I am modifying my strategy slightly to suit the current conditions. Do your own investigations but don't loose sight of the big picture whilst dealing with the minutae.