The current market has been a great opportunity for investors to create value through either renovations or small-scale developments.
Both of these strategies are proven ways for investors to make a profit which can then be used to go into more projects down the track. While this is great in theory, this approach also runs into a few problems.
Buying and flipping might sound great, but what you’re actually doing is running a business. You’re not really building an asset base.
The big issue that everyone faces when you’re running a business is that you will need to pay taxes on the profits. For most businesses, that means somewhere around 30-50% of your profits are going to be eaten up by the tax man. And that’s not the end of it.
If you’re developing, you may well be required to pay GST. Then on top of that you’ve got the high cost of sales agent commissions, marketing and legal fees when you sell the property.
That can quickly see your profits diminish rather fast and you will likely be left with a lot less than what you started with.
The other issue that was previously mentioned was the fact that you never really build up an asset base. One of the most powerful reasons to hold property in the first place is the capital growth that your asset generates.
The longer you can hold, the better your asset looks. If you go out and ask property flippers or developers if they would have made more money had they just held onto the property for another few years, most would have said yes they would have.
The way we like to do things is to use strategies like renovations or developments to help build our asset base.
Take a renovation for example. If you can purchase a property for a million dollars, spend $100,000 on it, for it to then be worth $1.3 million, then you’ve effectively just purchased the property for a lot less than what it’s worth.
The other big advantage is that you don’t have to sell to actually access the equity that you have created.
In the example above, you might have $200,000 of profit or equity that you manufactured.
If you sell to realise the profit, you will pay those agents’ costs, marketing and legals and then after that, you will also be paying taxes. That could see $100,000 plus wiped from your bottom line.
However, if you refinance and tap into that equity, you are effectively getting tax-free dollars that you can use to put into another project. Plus you still have the asset that you can hold onto for the next 40 years if you choose to.
That’s why things like renovations can be incredibly powerful not as a way to make quick cash, but as a strategy to build your asset base faster so you can benefit from long-term growth over the decades ahead.
If you are interested in getting ahead in the property market, feel free to reach out to a Henderson buyer’s agent today for more information.