Trading property
Question from Karen updated on 23rd January 2015:
Hi Ron, my partner and I have been 'trading' on our last two properties. Buying property that needs work, renovating and then selling. We bought our most recent property in Birkdale, North Shore and started renovating straight away. It needs at least $60,000 spent on it, my partner can do most of the work. We have about $350,000 in equity and could add at least another $100,000 with this current property however we are contemplating holding it and renting it (after the renovation) instead of selling. It will rent for $700 per week giving a very good yield. My only concern is our equity will be tied up in this property and we will have less equity for the next property. Or should we bite the bullet and look for another property to renovate at a lower cost and rent the current? Look forward to hearing your advice.
Our expert Ron Hoy Fong responded:
I believe the only property investing strategy is to buy and hold to grow your portfolio through accumulation. There lies the passive income where you do the work once and it continues to reward you many times over through capital growth and rents.
During a boom market you will find that all you are doing is shifting the capital gains profit from earlier properties into the next purchase because prices of new stock continually increases with time.
Assuming you did make a short-term profit of $100,000 and traded, you would then have to pay GST of $15,000, income tax of $30,000 and sales agent commission (on $450,000 it would be approximately $16,000) along with the holding cost, lawyer fees and any mortgage break fees. You may net around $35,000 but you will have no extra property. Numbers wise it would be far better to keep the property and refinance 80% of the $100,000 new equity through your bank. Then use the $80,000 as a deposit to purchase your next investment property whilst at the same time keeping the original property of which the capital values and rents will continually increase.
As a rule for my students, I recommend purchasing investment properties at a wholesale price, adding value to it through renovations. To get your deposit back out within two to six months by topping up your mortgage to the new retail value, then using the deposit to repeat what you have just done.
Ron loves to share his passion for property and his coaching course provides one-on-one mentoring and support that will empower you with tools, strategies and valuable insights so you can achieve investment success and become a property master.