Our new venture

[Perp]

The biggest factor against doing this as a business is that in most states you need a builder's licence if you're going to manage it yourself. Fortunately for you, I believe WA has an exception for "non-structural works", but no such exception exists in QLD or most other states (even though many people think that it does ).

Even so, make sure you're familiar with the regulations applicable to you with regard to safety at the worksite, contractors having insurance, etc.

 

[Minx]

The biggest factor against doing this as a business is that in most states you need a builder's licence if you're going to manage it yourself. Fortunately for you, I believe WA has an exception for "non-structural works", but no such exception exists in QLD or most other states (even though many people think that it does ).

Even so, make sure you're familiar with the regulations applicable to you with regard to safety at the worksite, contractors having insurance, etc.

Great point ozperp.

Take into consideration that if you say renovate the bathroom and the waterproofing fails within a couple of years you will be required to fix the problem as per usual business for builders. Anything structural will attract 7 years warranty. To get this insurance you need to be reg builder.

 

[INVSTOR]

I hate renovating - Do you want me to pass on some properties that I've come across that may be worth renovating? You need to do own DD of course.

 

[Tizzy]

Please pass on any address you think may be worth a look. Just PM them

 

[kidd1]

I would recommend buying the '09 BCA.

Good points though regarding the contractors insurance etc. A work site accident whether it's to do with the workers &/or structural will not only incur large costs if not covered, but time also.

Good Luck though Tizzy!
I look forward to hearing the great stories.

 

[Aaron Sice]

WA doesn't require a builder's TICKET up to the value of $20,000, but ALL RENOVATIONS require a building LICENSE from your Local Authority.

different state, different terminology, whole lotta difference.

remember i'm only a phone call away of you need a quick pointer.

 

[Perp]

WA doesn't require a builder's TICKET up to the value of $20,000, but ALL RENOVATIONS require a building LICENSE from your Local Authority.

different state, different terminology, whole lotta difference.

Thanks, BC, for correcting me! I thought it odd that you'd be allowed to be a "builder" without being a "builder" anywhere in Australia...

So, Tizzy, do you have a licence? Can you get one?

 

[Tizzy]

In the past, I've applied for permits to do alterations for each reno we have done, but no I don't yet have any license.

I think I might contact the Small business development corporation tomorrow and they can tell me what licenses and permits are must haves. Like Blue Card said, I assumed that we could do anything so long as it is under a certain price. We have trades people we access for skilled work.


This seems to be just one of a gazillion things I have to look into now.
The easy bit seems to be finding the houses!!

 

[13910]

The easy bit seems to be finding the houses!!

Yes, it's probably why more people don't do it. But that's the difference between those who dream and those that do.

Great to hear about your plans. Stick with it, don't let a few hurdles along the way slow you down and most of all keep in touch with photos and stories!

Cheers
Greg Johnson

 

[Perp]

Like Blue Card said, I assumed that we could do anything so long as it is under a certain price. We have trades people we access for skilled work.

I thought BC was saying the opposite; I must have misunderstood! BC, are you saying that under $20K you only need a permit for the project, but the individual managing the project doesn't need to have any certified skills? If so, then I guess my first position was correct, and WA is a whole lot easier to make this "renovating for a living" caper work than elsewhere.

Wherever you are, though, Tizzy, you have to add what you pay to tradespeople to the cost, if you're project managing, to determine project value and thus whether you need to be a builder or not. So if you pay a tiler $2K, an electrician $5K, a plumber $4K, plasterer $3K, order windows for $4K, carpets for $6K, plus do $4K of work yourselves (at market value if you paid somebody else to do the work; not just counting your material costs), then the authorities will view it that you're managing a $28K project and need a builders' licence.

The alternative is to hire somebody with a builders' licence to coordinate all the $24K, and just do the unskilled work (ie the $4K) yourselves.

 

[Tizzy]

Our working capital isn't sufficient to do it full time yet, so Mr Tiz will need to keep his day job for now and we’ll start with one house.

To do this as a full time business, I think we’d need sufficient working capital to have three houses on the go at once (at various stages) which is the number I've worked out we need to do in order to generate income that is reasonable.

I've estimated a few of the monthly costs we've got to allow for purchases about $500,000. Let’s assume three months of holding costs, however it could be as much as six months before a sale happens. So on the figures below, wouldn’t we need $300K as our operating capital to do this as a business? Feel free to comment everyone.
Purchase costs per house

$40,000 Deposit
$18,000 WA Stamp duty
$1700 Settlement fee
$178.00 Transfer Fee
$172.00 Government Enquiry Fee
$183.00 Disbursements
$1000 Rates and Taxes
-------------
$61,233.00 Cash required at settlement

Ongoing Monthly costs

$5000 replacement income x 1
$1600 holding/ interest costs for mortgage
$150 land & water rates/usage
$500 Super contribution
---------------------------------
$21,750.00 Total 3 months
Renovation Costs all up

$20,000 Renovation costs
Assume selling price of $579,000
Selling costs per house

$16,000 Agent’s commission
$1100 Settlement fee
Costs on profit

? GST
? Corporation Tax/ tax liability

 

[wylie]

Without even trying to analyse your figures, I remember asking our broker once about going down the buy/renovate/sell path and said "we would have to allow for three months' holding costs". His reply was that we would be better to always allow for six months' holding costs.

Perhaps it is better to allow for six months in all scenarios, just in case there are problems purchasing, settling, or even unexpected hold-ups during the actual reno.

I would love to follow your progress, as this is something we have thought about doing for a long time, but have never had the opportunity.... yet.

 

[Tizzy]

Well we've just received the initial spreadsheets and projections of possible figures from the accountant and our plan will needs lots of tweaking before we can even think of proceeding. Basically we can't achieve what we want by only putting in $300,000.

Meeting number two coming up.

 

[TheCount]

Hi everyone

Tizzy, please please dont take this as a negative post at all. I think it is great that you are looking for bigger and better things and I entirely commend you for it.

From the numbers you have given (and to me 3 months is possibly a push to do a full reno while working full time and have it sold + settled), you are putting a lot of capital at risk for a $9k return after tax (if your numbers are bang on and there is no overrun). in your calcs, dont forget to add the cost of your capital invested. If you are putting in $300k cash, that is risk free interest you are foregoing, so needs to be treated as a cost.
You are going to have to do a lot of these each year to even approach a decent comparision to a full time salary.
Also $20k isnt much for a reno to add $80k. Every dollar you spend has to add $4 value. Not impossible, but very difficult at the low end of the spectrum (lets face it, for $20k you are doing an Ikea makeover at best).

Personally I would be looking at ways to pull higher profit out of a project, otherwise it looks like you will be riding the razors edge.

 

[vbplease]

Tizzy,
$16k to the selling agent from the $80k profit... for every venture.. seems like money down the gurgler to me..

My suggestion, $4k for the cost of advertising on re.com (through an agent), and a valuation through HTW or similar. Give a copy of the valuation to each potential buyer, so there is no arguing over the asking price.

$4k / $80k = 5% selling costs
or
$16 / $80k = 20% selling costs

I know which one i'd prefer.. especially if you're making a business of it.

 

[kaf]

This is going to sound really daft, but if you have a basic business plan are there professional people who will turn it into something workable? I like the idea of the concept being turned into a blue print for the operation. That isn't really something I would be confident with. I'm an artist, not an economist

Tizzy you can get business plan kits from your state government (at least here in QLD you can) and I'm sure other sources have them too. I think doing one yourself is an excellent idea to see if your ideas are commercially viable and to project for things like cashflow etc.

Good luck with it all!

kaf

 

[Tizzy]

The Count I'm not offended by your comments at all, I'm greatful for the input. I haven't said a lot recently because I felt that I set off saying too much before the financial points were determined and then I felt a bit exposed.. Plus the accountant had pointed out our figures didn't work and he showed us the cashflow data and it was easy to see how the numbers we provided actually lost us $35,000 in the first year

Anyway, we've moved on from that and tweeked a few things, will be adding more capital to cut back on interest payments, increased the number of renos to 6 a year, reduced our selling costs (either negotiate a fee for numbers or sell them ourselves) and now we are back on the track!

It is probable our venture will be commencing in Feb 2010, but firstly more figures will be worked out to illustrate what the financial outcome will be for various negatiive scenarios that are possible eg: one property doesn't sell/ sells for $10K less than expected etc.

Mr Tiz will be working f/t on the projects. I'm keeping my job but dropping back to 2 days a week, so I'm available the rest of the time to research. That is, find the properties and best buys.

What we do know is that these renos on their own won't be generating much income. It will be the subdivision opportunities and additional building that should do that. It was important to work out our figures on the basics renos to start with though as the first 2 or 3 will be straight renos. May even just be units.

I've been given homework to do. I need to work out where we want to be in 5 years so that our goals can be written into the business plan being prepared (or started off really) by the accountant. I get to do the creative writing I also need to come up with a name because it will be a trust structure.

 

[Tizzy]

I have to agree with what you have said VBPlease, it doesn't make sense to lose 16K on sales commission, I'm happy to show the property then pass it to someone to close and settle the deal. Even the settlement fee would be negotiable.

 

[james_w]

Its OK - don't get me wrong, businesses can have Capital Gains too. Your situation will be that you buy a house, do some value add and then resell. The resulting profit is not treated as a Capital Gain but as a trading profit and taxed accordingly. Just like if you purchased pillows from China for $1, did some logos on them and resold them in AU for $5 - except this time it is houses.

Good

Probably a good idea.



Take the advice of your accounting professional, but I think you'll find that you'll be asked for Directors' guarantees so effectively you are going guarantor for your company - so it should not be an issue.
The issue will be, I think, obtaining finance for your venture in this credit crunch environment. Although if you have equity in property as security it may be OK.

edit: rolf was posting as I was typing

you will need a projected profit this should take care of serviceabiltiy does your accountant deal with these types of transactions regularly as we found we needed an accountant who knew the in's and outs of property trading.
Just a H&R tax accountant etc doesnt cut it, good for payg tax returns etc not a clue about property trading.

 

[TheCount]

Tizzy
dont worry about feeling "exposed", better to be a bit embarressed on a forum than find out you have spent a year throwing money away.
May I make a couple of points/suggestions:
1) Be careful with your calculations. Adding more capital to reduce interest payments could be a bit of a false economy. Remember, any capital you add is capital you arent getting risk-free interest on. You shouldnt fall into the trap of saying "If I put in $100k more cash, I save $5500 a year in interest", because you could earn around $5000 with zero risk by putting it in a term deposit. If it doesnt add up without the capital in there it might not work either way.
2) I have heard stories of people going into areas with wide ranges in sales figures, buying something at the lower end, spending good $$ fixing it up (not a $20k ikea+paint reno, making it a premium house) and selling it at the top of the range. Personally the idea of doing 2 quality renos making $50k each is a lot more attractive than doing 10 crappy ones making $10k each. A lot less pressure and a much bigger margin for error.
3) As mentioned, get a good ACCOUNTANT, not a bored housewife who has done a 3 day ITP "tax course". You will need to keep meticulous records. I have heard stories of people doing renos (like in 2 above) who thought they were smarter than Mr ATO. Dumb, dumb idea.

good luck