A friend asked me this very question while in the car the other day, as he’s thinking of taking on a project that will make him some money. My answer was a bit like this – although a bit longer as we were on a drive to Berry, which is about an hour and a half from home!
“You can if you buy well – in any market. Although it can get harder if a market is on the move (down, that is). Not if it’s moving up, though,as you could capitalise on both the renovation as well as the market (ideal).”
I, too, had a question for him: “What will you do with the money once you succeed and make a profit?” His response was: “Not sure. It depends on how much I can make.”
Okay, so, let’s work it out approximately. How much of your profit will go into costs and taxes?
Purchase price $850,000
Stamp duty $34,000
Solicitor x 2 $4,000
Renovation costs $35,000
Holding costs $18,000*
* (six months based on 20 per cent deposit, so no mortgage insurance so $3,000 per month interest-only)
Capital gains tax $10,000*
*(very rough guide as this will depend on your income for the year)
Real estate agent $17,000
Total costs $116,000
Sales price $1,100,000
Total profit in the pocket, roughly $132,000.
So, let’s say you secured a $100,000-plus profit.Well done! It took you five months to renovate and one month to sell, but finally you did it. Sure, you had to do some of the work yourself and find some friends to help you, but you saved about $10,000 to $20,000 in the process.
Now what? Time to buy a boat, right? Wrong. Do you go again? Is this like a commercial on gambling…? Do you have a problem? Is it time to walk away or do you play again?
You could – it’s not a bad profit for six months’ work. However, I’ve been around renovators in real estate for more than 20 years and in my experience, most will only make a profit a few times as there are a few variables that can and will change, including not buying so well, renovation surprises that blow the budget and changes in the market – all of which can really change the final outcome.
It’s a short lived game where eventually they get very relaxed and make a few costly mistakes that eat away their profits and, before you know it, they’re making half the amount of profit each time.
I shouldn’t generalise but I’ve seen it too many times.
I’ve especially seen this with weekend developers (those who decide they want in on the developing game cause “it’s easy money” but don’t know anything about building or real estate). It can be a huge trap for a lot of people.
So, my question to my friend was: “What if you went through the heartache of renovating or developing, but then kept the property instead of selling it? You could then use the equity in it to buy another one and then do it all over again. Sure, you don’t have the cash to renovate from your profit, but you could finance the whole lot and potentially even borrow to help renovate in an offset style account?”
This “slow and steady” way of running the race means that there’s less pressure on you to make your gain and leave the table, so why not stay in the game?
The game changer is being able to shift your mind into building equity rather than cashing in your chips after the renovation dust has settled. All of a sudden, the pressure of a sale has lifted and you’re now playing on a different level.
That’s not to say that you’ll never sell it. But what if you sold the very first property you bought and renovated after the next boom period? Held on for seven to 10 years, in other words, and cashed in your original $100,000-plus to watch the property value almost double from the boom? Isn’t that where the real winnings are?
I speak from experience here when I tell you that this is my third boom since I’ve been in the property industry and I’ve made money from each one.
How many times have you spoken to someone that used to own a property somewhere and then they say: “I bought for $350,000… You know what it’s worth now? $1.3 million!”Then you both shake your heads.
So, why not learn from the past and change that story for yourself: “This is the first property I ever bought. You know what I paid? $350,000.You know what it’s worth today? $1.3 million.This property gave me the equity to be able to buy the other 10 properties that I own.”
So, the answer to the question my mate asked me the other day – can I make money from buying and renovating property and is it really worth it? – is yes, there’s heaps of money to be made – just not in the short-term. Do the work and then sit on it because you make your money for when you’re a bit older, which is when you’ll need it the most.
Needless to say we started looking for properties on the journey home and we’ll lock something in by this time next month.
Until next time, I hope this helps someone.
Live your dreams.
