Many a first-time investor dreams of “flipping” property. That’s buying it at one price and selling it on for more soon afterwards. It’s not uncommon. Look around your suburb and you’ll see houses being renovated and flicked on.
If it works there is good money to be made (but watch out for the taxman). Renovating and/or flipping property isn’t, however, as easy as it looks. Some investors lose money on the deal.
Financial adviser Ian Milligan of the Financial Success Group reacted to a NZ Hearld article about a couple who had “made” $300,000 when they renovated and resold their homes. “(The) article indicates they make $300,000, which looks great.
However, he says, investors and homeowners alike fail to take into account:
• Any costs for renovation
• Council and legal fees
• Interest costs
• Time spent on the project, which can often be significant
• Real Estate fees
• Legal fees
The real biggie, says Ian is tax. Anyone, even a homeowner who buys a property with the intention of selling at a profit, is required to pay income tax on his or her gains. A lot of property investors try to get away without doing this. Some live in the home, but that isn’t a failsafe guarantee of not paying tax. Every year quite a few property investors get caught red-handed by the Inland Revenue Department.
If you’re thinking of buying and doing up a house or just flipping it, find a good calculator and do the numbers. A basic flipping calculator can be found online or downloaded from iTunes or the Google Play Store. Other more comprehensive tools, such as The Rehab Offer Calculator, which takes into account the detailed costs of a do-up, allows buyers to base their offer price on fact.
Mark Trafford, director of Maintain To Profit, a property renovation company, regularly sees newbie investors who have bought a property they can’t profit from. More than 40 per cent of them take twice as long or more to complete the renovation, he says.
Likewise 90 per cent of renovations in New Zealand go over budget and some of those cost at least 50 per cent more than the original estimate or budget.
The biggest pitfalls when renovating properties to sell, says Mark, are:
• Not having a real budget
• Not understanding property values or trends
• Being out of their depth
• Thinking everything costs less than it does
• Not valuing their time
• Failing to do their research
Experienced investors, says Mark, will use a spread-sheet based estimator tool to determine the cost of the renovation rather than leaving it to guesswork. Its’ incredibly common, otherwise, to forget costs such as underlay.
Mark Trafford Director “Maintain To Profit”