Hi All,
I wanted to let you all in on a recent project of mine which has recently been put under contract. Hopefully, someone else will be inspired or learn something new from this post.
I purchased this property in late November 2010. It was on the market at $310,000 and I was able to pick it up for $240,000 with a delayed settlement and the right of early access.I commenced planning straight away. One the afternoon it settled I was able to get all the strip work commenced. The renovation took a total of 14 weeks, this was a little slower then I had planned. However, I was working full time so it was a challenge to coordinate the trades.Some issues:
– Work over Xmas for trades was almost halted for 2 weeks before due to catching up on people wanting work done before Xmas and 2 weeks after due to many trades being on holiday.
– Went into contingency budget.
– Finance SETUP costs blew out, I know how to save myself $2,500 for the next one.Some things learnt:
– I used Gumtree for the first time on sourcing second hand building supplies. I would recommend it and use a handy man to do the labour.
– Obtain a discount of 30%+ for cash prices or it isn’t worth it.
– I restress the important of written purchase order/tenders/quotes. I did it on all but one job and was stung $2k.
– knocked down a 1mtr wall and added a 1mtr wall to the other side, this doubled the kitchen size. Be sure to visualise every aspect.
Final Numbers:Sold Price: $320,000
Purchase Price: -$240,000
Acquisition Costs: -$10,275 (duties, convey, loan setup and other)
Holding Costs: -$7756 (Interest, water, power, rates & other)
Renovation Costs: -$20,500
Selling costs: -$10,700 (agents, convey & other)
PROFIT: $30,768*
*Before tax
ROI: ~23%
AROI: ~84%Excellent work Kent! Would be interested in a breakdown of the reno costs and what you found worked the best in terms of bang for buck.
That's some impressive results
How did you manage to pick up the property for $240,000?
Nice work Kent, had you costed the renovation prior to purchase? did you adjust it along the way?
Andrew:
I'll post up the figures later this week, A basic breakdown is as follows:Kitchen: 3.5k
Bathroom : 1.75k + 1.75k
Repaint all inside (some outside): 2k
Floors: 3k
Electrical: 2k
Plumbing: 0.5k
Pool: 1k
Outside: 2k
Plaster: 1.5k
Other: 2KBiggest bang for buck:
1) New floors
2) paint
3) Remove out old fans and replace lights (had ducted Aircon)
4) New basic kitchen (I doubled its size for 4k – includes extending a wall 1mtr, cabinet maker made kitchen, new appliances and other bits)Kong:
The discounted off asking price was a factor of 4 things:
1) The property was over priced (some people often give these outlandish “discounts” they obtain as examples, but this property was over priced by about 15k-20K)
2) Asking the correct questions – find out the level of motivation of the vendor and what they want other then price.
3) Put in quite a few unsuccessful offers before this. Numbers game! But not too many as this is a good way to get a bad rep with agents.
4) Have contract clauses to protect you and offer as concessions when negotiating. Most people worry about the clauses other then the price.RenoTeam:
I had a budget at start with quotes from multiple trades beforehand. The trades are sent a purchase order prior to commencement. It is budgeted on a hierarchical basis (from most important jobs to optional jobs). The budget is adjusted along the way, and as you get closer to contingency you can start to choose the importance of work.Just updated figures according to my final P/L statement.
[“PROFIT: $30,768*
*Before tax”]How much will you pay in CGT?
Great work Kent
It is your full marginal tax rate as it is less then 12 months. but 50% of something is better then 100% of nothing.
Especially since you are doing this as well as full time employment, also turning over relatively quickly with time improvements no doubt on the next project, I see the real pros do incredible transformations in under a week sometimes.
Kent Cliffe wrote:but 50% of something is better then 100% of nothing.How true Kent, I often come across people who question the amount of CGT that is payable. I know I’d certainly prefer 50% of $30K as opposed to 100% of $0
Would it not have been better to keep the house, re-finance and then draw on the equity and use it to buy another IP?
Hi Larry,
When purchasing property, banks lend on two pillars. The first is deposit and the second is servicing. The most favourable banks I have approach calculated that I have enough income to service about 450K worth of investment debt (taking into account rent). This is because I am income and equity poor being younger.
With that 450K I could do the equivalent of one of deals every 4 months. That is once I have enough savings to draw down on the cost of renovations.
Calculating that roughly it would mean that I could achieve a gross annual return on 450k of about 27%. Now there aren’t too many times that property prices will annual almost 30%p.a. With this extra income I can channel it into a passive property portfolio (banks don’t take into account capital gains as income).
Now that being said, I would advocate 100% for actively buying and holding. The downsides of my strategy include:
– You have to be constantly looking in the market.
– You have to be active managing the trades.
– Higher risk
– Time commitmentIf you earn a good full time income and looking to build substantial wealth in property, what you suggested would be perfect. That is exactly what I manage for a lot of my clients (albeit we buy for growth in completely different suburbs). Buying well for future growth, adding value and refinancing is the key to getting past that 3 property sticking point.
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