Renovating - numbers before you buy

[Keen]

Hi all,

I am currently dabbling with what numbers make a good reno possible.
What purchase and sale prices to return what profit.

Is the following sound in my general assumptions?

I have some very rough numbers.

Purchase Price:$300k
WA Stamp Duty, Conveyancing and Bank Fees: $15k
Reno budget is 10% of the property value: $30k
Total Initial Cost: $345k

Sale Price: $420k
less Sale Agent fee and Conveyancing Fees: $22k
less Holding costs (120 days @ 6% pa) = $6k
less Tax - sold within 12mths - Salary $40k: $29k
less Total Initial Cost: $345K

After Tax Profit:$18k

One reno dollar ($30k) has returned $4 in value ($120k).
% return on purchase price: 6%

Not a great return given the risk. But I'd play around with these numbers.

One thing I am unsure of in the above calculation - are the Reno costs added to the Cost base as we are doing improvements and not repairs?
This would decrease tax to $18k and increase profit to $29k - a far better return of 9.7%.

Could we then look at suburbs that say have lower quartile prices in the purchase price range ($300k) and have a median / slightly above median sale price range ($420k)?

Any thoughts greatly appreciated - remember these are very rough numbers.

Kind Regards

Keen

 

[thatbum]

I'm not sure what you are trying to do - trying to work out if a property is worth it, or trying to find an area where the numbers stack up?

ie. Where are you getting these numbers from?

 

[HD_ACE]

A couple of things

Can probably half that selling comission.
What is the reno timeframe? As apposed to the selling side of things.

Does not have to be 10% budget. Can be less or more. Depends on the specific deal.

A project of that size should probably have a contingency buffer aswell.

Cheers

 

[Singo]

Could we then look at suburbs that say have lower quartile prices in the purchase price range ($300k) and have a median / slightly above median sale price range ($420k)?

Lots of 'investors' are searching for such properties. Have you found any suburb where you can buy at 300k and sell at 420k with a 30k reno?

 

[strongy1986]

Hi all,

I am currently dabbling with what numbers make a good reno possible.
What purchase and sale prices to return what profit.

Is the following sound in my general assumptions?

I have some very rough numbers.

Purchase Price:$300k
WA Stamp Duty, Conveyancing and Bank Fees: $15k
Reno budget is 10% of the property value: $30k
Total Initial Cost: $345k

Sale Price: $420k
less Sale Agent fee and Conveyancing Fees: $22k
less Holding costs (120 days @ 6% pa) = $6k
less Tax - sold within 12mths - Salary $40k: $29k
less Total Initial Cost: $345K

After Tax Profit:$18k

One reno dollar ($30k) has returned $4 in value ($120k).
% return on purchase price: 6%

Not a great return given the risk. But I'd play around with these numbers.

One thing I am unsure of in the above calculation - are the Reno costs added to the Cost base as we are doing improvements and not repairs?
This would decrease tax to $18k and increase profit to $29k - a far better return of 9.7%.

Could we then look at suburbs that say have lower quartile prices in the purchase price range ($300k) and have a median / slightly above median sale price range ($420k)?

Any thoughts greatly appreciated - remember these are very rough numbers.

Kind Regards

Keen

Well you certainly are keen!

Trying to make 20k profit...

Have you done a renno before? It's a very tiring and potentially stressful experience.

I wouldn't bother unless you can make 50k

Also what stuff can you do yourself ? Because 30k of work from tradesman won't get you that far unless its all cosmetic work

 

[travelbug]

Where does the $18K profit come from?

$420-$28= $392 - $345 = $47K minus 30% tax = $32,900 profit.

What are agent selling fees in WA? Seems high.

You can get a lot done for $30K with a cosmetic reno even using tradies.

Looks OK. I would want more than $20K, $33 would be OK. It can go sour easily if you are not experienced. Eg reno could take longer, cost more. Selling could take longer.
You've allowed say 6 weeks for the reno (that would be tight if using tradies). and 4 weeks to sell it (assuming a 6 weeks settlement).

 

[Rixter]

For a cosmetic renovation, I like to work on the following quick deal analysis...

1/ Purchase Price - 100%
2/ Acquisition Costs - 5%
3/ Renovation Costs - 10%
4/ Holding Costs - 4%
5/ Selling Costs - 4%
6/ Profit Margin - 12%

Total Expenses = 135%

So your comparative end product selling price must be equal to or greater than 135% of your purchase price. ie purchase price x 135% = sell price or more.

I hope this helps.

 

[Keen]

Thanks all for the responses.

thatbum - I am trying to understand the numbers so you can see what suburbs and then types of properties that stack up as potential candidates. The numbers come from the ATO, a real estate agent, conveyancing costs on previous properties I have bought and sold etc.

HD ACE - the selling commission is from an agent here in Perth. Reno time frame is 30 days. 90 days is for time on the market. I have seen quiet a few books / sites (eg Reno Kings) state 10% of the cost of the property as a budget, and stated that $1 should return at least $4 in value. This example fits that.

Singo - this is why I'm running numbers to see what amounts are viable. Once this is understood I could target suburbs with such a spread in property values as initial targets to be further researched.

strong1986 - Would be interesting to play around with the numbers to see what it takes to make $50k. Your points are all valid. Once the numbers stack up as a calculation it would then be for me to understand how realistic reno costs are when spreading my work been tradies and myself. Remember I am on a learning process here.

travelbug - tax comes from the ATO website - comparing a $40k salary to that of a $123k. $83k difference derived from Selling Base $398k ($420 purchase less Sales Agents fee and conveyancing of $22k) take Purchase/Cost Base $315k (puchase price $300k plus WA Stamp duty and conveyancing costs $15k). As this is sold within 1 year the whole $83k is taxed. Tax is an additional $29k. If you know any different please advise. As stated below does the reno cost get added to the Purchase / Cost Base? Hope so

Rixter - this is exactly want I'm after. Thank you very much.

Once I get based the rough "profitability" calculations I need to get a better understand of each of them - is 30 days to short a time frame to renovate (holding costs - thanks for your comments travelbug), is it possible to generate a higher increase in value ($1 reno equals $4 - what are the things we can do), do we need to increase reno costs (10%) to a higher % to get our $50k.

This is a starting point - the numbers and playing with them. Then the reality of if such numbers can be met or need to stretched and recalculated.

Kind Regards

Keen

 

[westminster]

Keen,

I'm wondering if there is another option where you rent it out and do all your planning during the renting stage. Then at 12mths lease ends you rock in, do reno, sell and because you've held it for more than 12mths you can change ATO calculations to be 50% CGT.

 

[HD_ACE]

HD ACE - the selling commission is from an agent here in Perth. Reno time frame is 30 days. 90 days is for time on the market. I have seen quiet a few books / sites (eg Reno Kings) state 10% of the cost of the property as a budget, and stated that $1 should return at least $4 in value. This example fits that.

Keen

So the agent is charging 5% to sell your place?
Assuming 1000 for conveyancing, your left with a %5 commission to sell it.
Shouldnt be more than 2-2.5%


Cheers

 

[D.T.]

HD ACE - the selling commission is from an agent here in Perth. Reno time frame is 30 days. 90 days is for time on the market. I have seen quiet a few books / sites (eg Reno Kings) state 10% of the cost of the property as a budget, and stated that $1 should return at least $4 in value. This example fits that.

I was quoted 10k to sell a 400k place by a local agent here in WA

 

[Keen]

I have a place in Bunbury in which I was recently given a scale of fees from an agent - $420k is $19k
What more can I say?
Perhaps I should ask some Perth agents as your indications below suggest the fees are a rip off.

 

[Keen]

Westminster - certainly worth considering - but holding on for a year does stop you from doing subsequent reno's using the same funds. If you can do greater than two renos in a year then its probably worth selling asap - if not then probably best to hold for a year an increase your profit.
Another calculation?

 

[travelbug]

Yes you add the reno to your cost base. That's why the figures were out.

You don't necessarily have to spend $30K. That's just a figure given to people as a guideline as a maximim you should spend.

You really need to know wghat the reno WILL cost. 10% is just a wild stab in the dark. We spend $15K totally renovate a house (that's a house sub $300K). But if we did a $400K house the cost would only be $5k more as we'd put better quality bath fittings and lights.

 

[redwing]

Hi Keen

There was no deposit amount in your initial figures, where is the deposit coming from (savings, other investments,PPoR equity etc), if the latter there is interest costs there also.

Purchasing a $300,000 IP would roughly require around $15,000 deposit (5%) with LMI or around $60,000 (20%) without

One reno dollar ($30k) has returned $4 in value ($120k).
% return on purchase price: 6%

Should your % return should also take into account the deposit invested and holding costs

Is flipping such a good strategy in Australia with all the costs and taxes involved?

I guess on $40k p/a income $18k profit is near on half your annual wage?

You've created $75k equity, plus whatever deposit you've put in

 

[Rixter]

Rixter - this is exactly want I'm after. Thank you very much.

You're welcome.

For an advanced structural type renovation, here's a quick deal analysis..

1/ Purchase Price - 100%
2/ Acquisition Costs - 5%
3/ Renovation Costs - 22%
4/ Holding Costs - 4%
5/ Selling Costs - 4%
6/ Profit Margin - 15%

Total Expenses = 150%

So your Comparative end Product Selling Price must be equal to or greater than 150% of your purchase price. ie purchase price x 150% = sell price or more.

However, the best way to focus on the above formula is -

(Comparative end Product Selling Price / 150) x 100 = Your Maximum Purchase Price.

I hope this helps.

 

[Keen]

Thanks again Rixter!

Redwing - deposit is lent funds from a Line of Credit which has sufficient funds for the 20% plus costs. $345K @ 6% for 120 days = approx $6k

Profit margin is so I can I ask if I look at a property worth $X, how much after tax profit can I potentially make.

As the strategy is Buy, Renovate and Sell we would buy under my wife's name.

Kind Regards

Keen

 

[MTR]

Hi Keen
I think the profits seem very slim for the amount of work required.

Why not look at areas that are still rising, then either offload in 12 months therefore 50% CGT, or access equity, or perhaps then do a makeover and add more value.

One area comes to mind Beechboro, its just so strong, in particular the lower entry level $400s, they continue to rise, heading to $450K+.

Just another suggestion

 

[Rixter]

Why not look at areas that are still rising, then either offload in 12 months therefore 50% CGT, or access equity, or perhaps then do a makeover and add more value.

Jane Slack-Smith's ( Buzz on SS) Trident Strategy she uses for obtaining high capital growth from renovating is -

1/ Buy under market Value
2/ In areas set to grow/poised to out perform average CG.
3/ then, Renovate to manufacture/add equity

I hope this helps.

 

[MTR]

I would have to say good luck to anyone trying to buy property under market value in Oz market today, in areas that are poised for growth, you will probably find there will be multiple offers. From experience this is very difficult as there is generally too much competition.

I am trying to eliminate my competition so paying more than asking price for a property at the moment so it does not get listed. There will be a stampede if it does get listed, that I am sure of.

I know in three months time it will be worth much more as this market is not meeting current demand, buyers that miss out are prepared to pay more for the next deal that comes along.