Forum Replies Created
Hi wealthyivd
If you want to go down the buy-and-hold, negative geared path, then I don't really have any answers for you, apart from get a job that pays about $100k more than your current one.
But if you haven't read Steve McKnights 0-260 properties book yet, then I suggest you go and get it, because he explains quite a bit about the difficulties of negative gearing, and also talks about other property strategies that might work better for you.
My thought is that negative gearing works best for people on a high income, so if you have a lower income you should really think about what you want to achieve and what is the best strategy to get there.
Cheers
Jason
If your accountant is unsure of this (ie if they don't handle a lot property developer clients) then do some accountant hunting and grab yourself a more specialized one.
Hi
One thing I will add is that after you have got a confident estimate of all costs (don't forget GST), and a very confident estimate of the end sale price (remeber to take off selling fees), take a moment to work out what is your profit on total costs as a %.
To do this, subtract total costs from net income to get a gross profit. Divide gross profit by total costs and multiply by 100 to get a %.
This is called the Profit on Cost, or Margin on Development Cost (MDC).
Here is an example of a 4 unit development:
INCOME
Sales Income Unit1 $590,000
Unit2 $580,000
Unit3 $615,000
Unit4 $625,000
Net Rent $9,634
Total $2,419,634
COSTS
Purchase Price $775,000
Stamp Duty /Establishment fees $51,352
Conveyancing Fees (purchase) $1,950
Consultants Fees (inc architect) $35,400
Construction Unit1 $173,290
Unit2 $202,280
Unit3 $197,990
Unit4 $208,130
Contingency (6% of construct) $48,101
Demolition $20,000
Rates and taxes $8,838
Landscaping $20,000
Drainage and council fees $25,000
Selling agent fees $72,300
Conveyancing Fees (Sale) $8,000
Borrowing Interest $94,720
GST payable $56,596
Total Costs $1,998,947Gross profit = Income-Costs = $2,419,634 – $1,998,947
So Gross profit = $420,687Margin on Development Cost = Gross profit / Total Cost*100 = $420,687 / $1,998,947 *100
So MDC = 21.05%I would think very hard before doing a deal where the MDC was less than 20%, and 25% is much safer. Sometimes it may be ok to be closer to 15% MDC if the risk in the project can be reduced somehow, like getting a 6 month+ settlement, or buying subject to council approval.
My experience is that it is very rare to find a deal with a 20% MDC if it is less than 3-4 unit development. So if you are only building 2 you may have to take a bigger risk to get started. Be aware though, I am told it is much more dificult to get bank finance for a project if the MDC is less than 15%.Hope this is helpful
Cheers
JasonGood news. The settlement went through as planned on Monday 25th.
What a relief – at last.
Now on to bigger and better.Hi billy
I can also vouch for the quality of "renovation toolbox". It also comes with DVD's on how to crunch numbers, case studies etc.
Good value. It helped me be able to confidently estimate my first reno, with little previous experience. If you are interested you can read about my reno here: https://www.propertyinvesting.com/forums/property-investing/value-adding/4320913Not sure what city you are in, but in Vic you would need to pay stamp duty even if you do purchase using an Option contract.
Insurance – you can't get builders warranty insurance unless you are a builder. And why would a vendor trust you to do work to his house, and then carry the insurance risk himself for 6.5 years, just hoping that you did the work well and there will not be a claim?
Also, I think there are other laws also, like an owner builder must use registered tradespeople to do the work. It might depend on the state, but bottom line is you cannot do numerous renovations without either being a registered builder, or moving into some very shady and uncertain legal areas.And like others have said, the key to success is being an absolute area expert in what you will be selling. You need to know to a very high level of certainty what you can sell for, and what features and quality you need to include to get that price.
Good luck.
Hi Jaffa
The reno is supposed to settle tomorrow – 25th Feb. The buyer says everything is in place at their end, and my solicitor says everything is in place from my end. They have done the final inspection too, so this time I can't see any problems, but you never know until the money comes through.I will put up a post tomorrow (if I remember) to let you know what happens.
In other news, we settled (buying) on a property in Chadstone on Fri 15th Feb. It is going to be a 4 townhouse development. Last week we got it rented out on a 6 month lease, and this week we should get the planning permit application (DA) ready to lodge at council.
Also still looking for more. A couple of irons in fire, but nothing definite yet.
Hi all. Sorry to take so long to answer the question "what are we up to now?".
A bit of a saga to tell you…. I will give you the short version.It all started with that lovely 30 day, cash, unconditional offer we were so glad to receive back in Sep '07. The purchaser did not actually pay any deposit when signing the contract, saying that he would pay a 10% deposit within 2 days. This was the start of a string of excuses and apologies and promises that never resulted in any actual money being paid as a deposit. The settlement date arrived and we were promised and assured that the whole amount would be paid in cash on that date. Then some more apologies, excuses, "we couldn't get the money out of the bank. They are taking ages to release our money. Sorry……"
The buyers happily agreed to pay penalty interest of 14%p/a on the full purchase price, so we thought we might make a little more than first thought.
Settlement was re-booked, and re-booked over and over. After about another month we issued them a "notice of rescindment" which means that they had 14 days to pay up or the contract is void. However, we really wanted them to pay up because they still had not paid any deposit so we had nothing to pay our extra costs with. We wanted them to settle so we got the original price PLUS all the penalty interest – about $7,000 by that stage.
Then the story emerged that they had inherited the money, and not realised at the time of making the offer how long it would take to actually get the money in their hands. A plausible excuse perhaps, so when the buyer (now in direct contact with myself, not through agent or solicitor anymore) assured me that the money was now in his account, we gave him another chance to settle.
This time he told me 2 hours before settlement that everything was under control, and his father was on the way to the settlement officer with the bank cheques in hand. Yet still no money showed up.
This time he told me that there had been a major medical emergency in the family, which turned out to be him (the buyer) being diagnosed with terminal cancer, and not going to be around for long anyway. But he still wanted the house, so we tried again to settle a couple more times. I tried to meet him – and got stood up. And then finally (yes, I know I let it drag on too long) I said forget it, I will sell the house again.
Within 4 hours of making that decision we had another offer of $345k, 30 day unconditional. We accepted due to the short settlement, and the fact that it was almost Christmas and we didn't want to wait, and then after we had all signed the contract, the new buyer tried to re-negotiate an extra 2 weeks on the settlement.
We said no, but agreed to an extra 2 days. They asked for a letter stating we would give another 2 days, so we wrote it for them. Then on Christmas eve they pulled out of the contract on the last day of their cooling off period.
After Christmas they asked for their $1000 deposit back, and got quite upset when we kept the 0.2% ($690) stated in the contract as the penalty for cooling off.
We had a few more offers after Christmas, but all too low to consider.
So then in early Jan '08 we ordered more furniture, got the house pretty again, re-advertised, started an auction campaign (just to do something different and try not to let the house appear "stale") and basically started the sale process all over again.
It took about a week after furnishing the house for us to get another good offer -$350k on Fri 11 Jan. It was a 45 day offer, subject to valuation. We said we would think about it for the weekend.
Then the next day (Sat) buyer number 1 sent me a message asking if I would give him one more chance if he took a bank cheque for the full puchase price plus costs to my solicitor's office on the Monday morning. I told him if he was there by 11am then I would still sell to him. He didn't show (surprise).
The new buyer (number 3) meanwhile called the agent on the Monday morning and said they would make the offer unconditional. So at 12pm I got the agent to call them back and explain that we really wanted about $360k, so after a couple more hours of negotiating they raised the offer to $355k, 45 days, unconditional.
We agreed and got the papers signed that night. They paid a 10% deposit by bank cheque the next day. Their cooling off period has ended, and we are once again looking forward to settlement -this time on 25 Feb.So there is the fairly short version of the saga of selling our first reno project. Moral of the story is that the house isn't sold till the money is in the bank.
Now, what are up to from here?
After looking hard for a couple of months, making several offers, and being beaten on price numerous times, we finally bought a home in Chadstone which is due to settle on Feb 15th. It is a 4 bed, 3 bathroom Weatherboard home on 1013m of land. Our intention is to get plans drawn and a permit approved for 4 new townhouses. We will then aim to sell the property with the Planning Permit (DA) and make a profit of about $80-$100k. Our other option is to appoint a builder to construct the dwellings for us, and sell them individually when complete. This would have an expected profit of over $400k, but this is not our preference as it would be a much longer project, it would expose us to more risk, and it would take more cash than we have. Also, we would rather have a quick profit in our bank as our company is still quite young.So far we have appointed an architect who has made good progress on preparing the permit application, drawing plans etc. We are still finalizing the loan, and are trying to keep the architect and others moving as fast as possible.
Apart from that deal we are looking lookin looking for more, and have some exciting prospects currently under investigation.
Beeuda full. And quick too. I like it. I like it a lot.
Lots happening. Tell you more on the weekend.
Thanks Andy
Good stuff.
Good luck with the ceiling.
JaseHi corhig – Pabs Rental: 1800 201 020
Hi chpropdev
Those are some absolutely ripper ideas. You have got my head churning all over the place. Thanks a million (maybe 2!!)
Re: using percentages
I agree with this too a point. Before doing this deal we worked out all the % returns, did the 3 tests in Steve's book etc. I will keep doing this with all deals.
But, if I had a $1M deal that would return 10% in 12 months, or a $150k deal that would return 20% in the same time period, I would do the big deal, small %, big $profit. Obviously some risk assessment involved there too.
I have heard Martin Ayles say "you bank dollars, not percentages".
That is why I said I would probably not do something that would make less than about $30k. The effort of getting finance, managing deal etc is too much. I would waste too much time on the small deal, and not be able to take advantage of a better deal.
Of course, this opinion is based on 1 reno project, a labor intensive type of deal, so if I found a way to only spend a few hours on something, and there was a low buy in price, I might change my opinion.For the sake of some more stats, here is the % of our reno.
Total cash that we put in was $40k each partner =total $80k
Profit of $41500 =51.9% Return On Investment
Contract date to settlement date is 152days =0.416years
So Annualised %ROI =51.9% divided by 0.416 = 124.8%ROIFor Steve's 3 tests (see 0-260 book):
Net Profit Percentage =51.9%
Required =23.2%
PASS2x Interest Paid =$11,122
Cash Back = $41,500
PASSRisk free return ($80k @ 5%, for 152days)= $1665.75
Danger Money Multiple = 24.91
Required =12
PASSWasn't that fun??
Jase
Hi
Thanks everyone for the encouragement. Much appreciated.
Sorry for taking a while to reply – been flat out crunching more deals.Crashy, thank you for your input, and for asking me the hard but important questions. I have been considering your comments for the last couple of days, and here is what I've come up with:
crashy wrote:you would obviously realise it could easily have gone the other way. generally those who say "I dont care if I make a profit or not on the first one" dont become successful in this game.At the time we made the decision to buy the house, we did have some of the attitude that it would not be a total disaster if we just broke even on our first deal. We did try hard to choose a deal that would be profitable, so our decision was a calcualted one, but our eagerness to get started certainly played a part.
I think that "experience vs profit" attitude was a mistake, and it could very easily have caused us to lose $30k. During the project I heard a speaker say "If you lose money on your first deal, the experience you get is how to lose money, not how to make money." That hit home for me, so I was glad the deal went ok.
Also, being in a rising market is helpful to cover over the mistakes, so a rising market is easier to learn in than a tight market. We knew the market was rising at the start, and thought that would help us not to lose.crashy wrote:as long as you have learnt from your mistakes (and Ive yet to see you admit you made any except for missing entry costs) thats the main thing. Experience is defined as the sum of all your mistakes. Therefore, if you didnt make any, you didnt really gain any experience. at least thats what they say………
dont take this as negativity…………just realismThe biggest lesson I learned only hit me today when I met with my old boss for a chat. He is a successful developer and explained to me how much money I really didn't make.
Here is what he said:
Our profit was about $41,500, but that included 860 hours of unpaid labor. Roughly 400 hours was mine personally.
To hire sub-contractor labor would be a minimum of $35/hour. So apart from me, we should have paid another $16,100 in labor costs. Profit is down to $25,400.
Next, by choosing to leave my job and do this deal, I missed out on earning wages for 12 weeks so far (because I haven't started the next project yet) which was about $1,175p/week before tax =$14,100. That means I just lost $14,100. So if I paid myself back that amount, the profit is down to $11,300. (If I paid myself $35/hour for 400hrs it is $14,000 – so about the same.)
I did actually pay myself $3,600 included in the reno cost, so I can put that much back: profit is now $14,900.
Next, the profit is split b/w me and business partner, so my half share is $7,450.
After I pay tax on that, it will be about $5,200.
To get that $5,200 I also worked many hours at night that I did not account for. If I accounted for all those hours, the actual profit would be very close to 0, or maybe less than 0.
So the question my boss asked me is this: "Do you think you got a big enough return to be worth the risk you took by leaving your job and putting $40k of your money on the line?"
My honest answer is no, that is not enough return to justify the risk.
So then he said "So what is the lesson you learned?"
Answer: Do things differently next time.
Specifically, here is what I will do differently from now on, (AND I hope others reading this will make good use of my learning experience when you make your own investing decisions):
1. Pay myself for every hour of work done.
2. Only do deals with a much greater expected profit than $15k.
3. Estimate and included in costs all labor associated with deal.
4. Don't work under a "false economy". Understand how things really are, the true cost of what you do.There are many more smaller lessons out of these, but I will give my head a few days to chew on those.
So in summary, I think I have made the right decisions so far based on what I understood at the time. I am pleased with where we are now, and where we are heading.
I think I have had a great learning experience out of our first reno, and to have done it without making a big loss is partly luck, and partly good management. Though I can now see that it could very easily have been a painful lesson.
I think that I can now apply these lessons and start to do truly profitable deals, but it is more complicated than I first thought.crashy wrote:any thoughts about doing renos in other states where stamp duty is lower or doing renos on your PPoR?Renovating with 4 kids in the house is not something I wish to experience.
I also don't want to travel much over 1/2 hour to do a reno. At least not right now. Maybe when I am more experienced.That's all I've got for now. Keep those probing questions coming. See how much we all are learning? Fun.
Thanks again crashy for your questions. I honestly did not take your comments as negative. I appreciate your help.Hopefully those of you about to do your first deal can now do it better than we did, and be aware of some hidden risks.
Cheers
JasonHi
Foundation: No, haven't worked out tax yet. Meeting with Accountant next week to sort it all out.Crashy: 1. No, would not have proceeded on a 5k expected profit. The 15k that we expected was a minimum expectation, and also we were very keen to get started. We thought that being our first deal if we came out with any profit at all it would be a success. Looking back, that is probably not a good way to make the decision, but we took the risk and it worked.
2. If the market was not red hot, we would probably have got $325 – 330k. If the market had downturned we would probably have spent less on the reno (about $25k) and then sold for $310-320k, so I still think we would not have lost, but it would have been much less fun.
3.I am happy with most things that we did because it was our first deal, but for future deals I think I will change:
-the minimum expected profit to be higher, say 25-30k minimum.
-allow for much more paid labor ( and still have the desired minimum profit)
-consider adding bedrooms etc as a way of increasing value further (this would not have been feasable on this deal though)
4.Spent over budget on border tiles, rendering, painting outside, deck area, plants and mulch.
Spent under budget on kitchen appliances, carpet, floating floor, roof re-spray, paint driveway, rubbish removal.
5. Yes. Do you think a Toblerone will be sufficient?Hi millions
At the time of buying most homes were about 260-280k for the average ones. The one we bought was probly worth about 250k, so I think we got it about 8k under value. Now the cheapest ones are about 275k, and the average ones290-300k. So about 20k growth.
I think our final product would have been worth about 320-330k in the original market. We could have sold it about 10 times at 340k, and only 2 buyers offered 35k, so I think we got the top dollar for it. So that is about 20k growth also.
I have been starting to look at more expensive properties, but also looking at similar ones to ours. I guess whichever has the numbers stack up.Hi all
Ok, time for the low down on all the numbers.
Here they are, as accurate as I can get them for now. The selling and holding costs might vary slightly depending how it pans out at settlement.Item Budget Actual
Purchase Price $242,000 $242,000
Acquisition Cost $15,612.19 $15,495.23
Renovation Cost
-Structural $400.00 $357.93
-Inside $14,476.91 $15,675.43
-Outside $6,805.00 $7,413.77
-Front Garden $1,600.00 $1,573.00
-Back Garden $1,980.00 $3,230.29
Total Reno Cost $25,261.91 $28,250.42
Holding Costs $6,264.32 $5,560.79
Selling Costs
-Agent+Ads $11,748.00 $12,550.00
-Furniture $2,500.00 $2,374.34
-Other $1,500.00 $2,274.85
Total Cost $304,886.42 $308,505.63
Sale Price $310,000.00 $350,000.00
Profit $5,113.58 $41,494.37
The budgeted profit is very small, but our first set of numbers actually had about $15k of profit. Then after we made the decision to buy, we learned of a few more bank fees, and a couple of other things that brought the expected profit down to that $5k. Also, the $310k sale price was our worst case. We expected around 320k, and hoped for 330k.
The reno cost did go higher than originally thought, but this was due to our deliberate choices, not just by "accident". We saw that the market was going strong, and that by spending more in a couple of areas we could lift the whole house to a better level. Specifically, we spent more on the bathroom, and on the deck. We had planned to do very little to the bathroom, but ended up re-tiling floor and painting wall tiles. On the deck we were just going to put brush or bamboo screening up, but decided on the cement sheet and texture coating instead. We were also going to just render the front wall, but decided to go around to the front door. I think it was worth the extra cost on these items to get the final product that we did.
Also, the total hours that we did was 860. We originally thought about 400-500 hours.
So at 860 hours I get an average of $48.25 per hour. Most of the hours were donated by friendly family members who want to see us succeed, so we are very grateful to themBut if I had to, I could have probably hired workers for an average of $35 per hour, so I would still have done ok. In future I will be trying to do less, and outsource more.Also, if I hired skilled help, the hours would be less, but I'm not sure how much less. At a guess I would say maybe 600-700hours instead of the 860. So there it is. Bring on the questions. JasonCool off period is over. No more backing out. Onward to profit we go.
I just put some more photo's up on the flickr site. Some bathroom shots, and a couple of the house on open day, with driveway painted and carport complete. Sorry it took me so long.
Thanks crashy.
It looks like everything will be fine. I think half the problem was a bit of family feuding on the part of the buyer. A brother and 2 sisters buying the house for their parents. Once the agent worked out who was really in charge, it helped to make things smoother.
So this time tomorrow we should be out of the woods, and ready for a big fat deposit early next week.
CheersHi
What a day.
The "unconditional" offer suddenly got a heap of conditions added to it.
The buyer went back to have another look at the house and started to pick little problems like the windows need lubricating, and the wardrobes could use some paint on the inside.
They are using the threat of the 3 day cool off period to get these things added to the contract.
Anyway, it just means about 1 more day of work for me, and the offer amount is very good, so I might as well accomodate their wishes.BTW, I haven't forgotten about posting all the details of reno costs, profit margins etc, but I want to wait until after the contract is unconditional before I put up all that detailed info.
Cheers.
