Flips

Thanks @Paul@PFI. My investment partner will definitely be renovating and selling in a business-like manner. The income from that will be his primary income. With the proper records, I think it would be easy to demonstrate it's being operated as a business. I wasn't sure with my involvement being minimal, if I could treat it the same way. An easy way around this is for him to buy the properties in his own name, then there wouldn't be any confusion.

 

My experience with making money with quick flips is having a trade background is where a lot of the cost saving happens. And of coarse buying well. Have just finished a reno in frankston where I made 30k for 2 weeks work not a huge profit but happy with the result, by doing a lot of work myself and knowing how things come together I believe I saved half the cost of the reno.

 

Great profit was that after selling and taxes?

 

No planing to hold property for the time being
Basic numbers look like
250k purchase
18k lmi, stamp and legals
16k reno, new bath, kitchen floors paint
1k holding costs
Revalue came in at 320k
Was more of a trial for myself, did a reno 2 years ago in the inner west of sydney, where I believe most of the money was made in a rising market.

 

I had a set up similar to this previously. My best mate and I went in 50/50, and then he would get paid by the hour as a tradesman. It worked well for a couple of flips, but after a few we hit some problems and it took a dive south.

I lost $100k and my best mate. Weigh up if it is really worth it.

Not saying it cant work, but make sure you have all your ducks in row.

Blacky

 

can you explain what happened in that scenario and what you would have done differently next time around?

 

Sure
We were operating a 50/50 JV.
The model was fairly simple. 50% equity/capital each. He worked on the property for an agreed hourly rate - I couldn't work on them because a) I worked full time and b) I don't have the skill set.

Anyway we did one or two and made some small money. We then jumped in again. The plan was straight forward. Buy, subdivide/renovate and sell. The numbers worked.

He had 2other properties which he was finishing up, however, there were a couple of unexpected delays. Add in a tenant trashing one of his other properties (and I mean seriously trashing it) which then had to be renovated to get it leased again. So it delayed our project. However, we had already started with the gutting of the house, so it was un-rentable.

It was all a perfect storm. Too much work, too few hours. Cashflow dried up. In the meantime the GFC hit and property prices dropped. We managed to scrape enough cash together to get the place finished however the finished product was 'complete' rather than 'nice'. We simply couldn't afford the extra touches to bring it up to spec.
It then took a couple of months to secure a buyer.

We got out of it well behind. About $200k all up which we shared.

So - what went wrong.
1) structure - we didn't have a proper structure. It was just the two of us running around buying and renovating.
2) planning - our plan in our minds was simple. Buy-renovate-sell. That was about it.
3) roles and responsibilities - these weren't clearly defined. It created a fair few heated discussions especially when things started to tighten.
4) Cash and cashflow - this was never really discussed. How things are paid for/re-imbursed.
5) contingency - whats that?
6) "it will never happen to us" - we thought as we are best mates these stories you hear just wont happen to us. We can get over it. Largely, after many years, we are. However, it doesn't put things back to where they were. Although we both take responsibility for our own actions, and there is no bitterness, we just aren't where we used to be. Maybe we never will be.

If you are going to do it, do it properly. Document everything. Every agreement, every meeting. Not because you don't trust each other, but simply so that it confirms you are both on the same page. Memories are short.
Protect each others interest. Set up a proper structure and protect each others (and your own) assets.
Structure finance correctly. Make sure that if you are putting cash in, that the cash is available now, and separate the funds. Have a contingency and a contingency fund. Make sure you both understand where additional funds is coming from if/when it all goes pear shapped.

Seriously question weather or not it is worth it.

Blacky

 

Thanks Blacky. This is great advice.

Understood.

 

thanks blacky for the info. if you were to say buy around the 300k mark and do a reno and sell (not re val and get equity out) what would be the average price you would want it sold for at that price range?

and no capital growth.

 

What are implications if trying to access equity with current finance changes APRA? Can investors tap into equity? I have not been following this

 

Reno/flips make sense in a rising market, otherwise you need to buy below market value and be prepared to be hands on to save money, it's a tough gig.

Alternate is higher end product, higher % profit, however more risk.

 

I would assume not. At least not in the short term.

 

This is what my investment partner and myself want to do when Perth starts to recover. We also do most of the work ourselves. Next will be our fourth project. But I am taking Blacky's advice onboard re: structuring and ownership arrangements.

 

That adds an additional layer of risk, you must sell if you require funds for next project. Imagine doing this now in Perth market, nasty, or any market that is falling.
Rising market no issue.

 

If anything our early success made us even more complacent. Tread carefully.

The biggest issue with regular flips is the entry and exit costs.
5% on the way in (stamp duty, legals etc)
2% on the way out (REA etc)
and tax on the profit (if you make 20% profit, and your tax rate is 30% it is a 6% cost) (lots of variables to this).

13% gone in the wind and you are doing pretty well to hit 20% profit in the first place.

However, if you can add value, increase rental demand/price and hold you cut 8% off your costs.

Blacky

 

Add a falling or flat market and you are in trouble.

Flipping sounds great when there are low entry and exit costs like USA where duty isn't a factor. Unfortunately too many watch TV shows where they learn the term flipping and think they can do same here. Oh they can and did when prices were climbing. Add a flat or falling market and you will be chewed up and spat out. Then you end up with a property that is tenanted for a long term and all the good is gone...Often in a burb where you would never have bought to hold.

 

Anyone who tries to make money from flipping in a falling or flat market deserves to lose money. IMO, it is only a strategy for a rising market.

 

What would happen if Fred and Sally sold two properties that year. One actually ended up making a loss of $50 000 and the other made a profit of $50 000. Would the ATO then say, both activities were profit making activities like a "business" and therefore as your "business" has made no net profit you don't pay tax on either sale?

 

The ATO would likely argue that only the profit making one was a business venture and the loss one was just a main residence!

 

Yeah I bet!