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Buy, Build or Flip, Sell or Hold

House and keys

Buy + Build + Sell or Hold

PROS

This strategy is similar to the“buy and subdivide and sell” strategy and once again not for the fainthearted. On the upside, there is good profit to be made, particularly for those able to be involved in the building process themselves. Adding real value by building or improving a property is one of the most fundamentally sound ways to make profit.

 CONS

As above for subdivision –tax consequences will be adverse and you will have to become involved not only with councils, surveyors and the like but also with builders, tradespeople, suppliers, etc. Delays in any of these areas can lead to lengthy hold periods. It can also erode all the profit from a project. In some cases, if very lengthy delays are experienced, the entire project might not even turn a profit.

Buy and Flip

This can mean different things to different people but what it usually means is to buy ‘off the plan’ and sell before settlement. Some investors use this strategy to buy a few properties and then sell most of them before settlement. They then apply the profits to reduce the debt on the properties they retain. A fantastic strategy for the experienced investor and it works well in an upward-moving market. However, it can be fraught with danger if the market falls during the construction period and you don’t have the spare resources (cash or equity) to cover the shortfall.

house flip renovate

It can be a bit like the stock market ‘margin calls’ that are rapidly bringing the share market to a grinding halt. If you intend to buy and flip, it is important to get professional advice. This is to ensure that you can cope with a possible decline in value. If your financial position is such that you could survive such then the buy and flip strategy can bring some fantastic possibilities. If you proceed down the buy and flip path (after seeking professional advice) – look for developments with the following criteria:

  • – Look for brand new developments.
  • – Developments that have a suitable timeframe to completion.
  • – Projects with Progress Payment Plan that does not require the bulk of the payment until near the end of construction. Only a 10% deposit is required to hold the property until completion and settlement.
  • – Be first in. Often the best gains are to be made early when the developer needs to sell quickly to meet the bank’s “re-sales” requirements. This will assist an investor as the project nears completion. The price may have already risen substantially as the developer is no longer in need of a quick sale.
  • – Work with a professional that can assist you to determine the suitability of potential properties.

 

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Buy and Sell or Sub-divide or Hold

Buy + Sub-divide + Sell or Hold

PROS

Fantastic opportunity for those not faint-at-heart. Serious profits can be made by buying land capable of subdivision and doing what the previous owner was unable to do.

CONS

You need a large amount of capital (i.e. cash) behind you as, particularly in the current environment. The banks are simply not willing to lend serious money to even the most experienced property developer.

If you are a novice, your chances of getting finance are seriously slim. It can still be done but you will need to put in a large portion of the funds for the development yourself. There are ways around this, such as: vendor finance, joint venture partners, and obtaining pre-sales. Above all else – seek professional advice. In this instance, the tax man will definitely see you as a property developer rather than an investor. This means you will be subject to income tax and GST as opposed to the far more lenient capital gains regime. You will also need to become involved with local councils and their development approval processes, surveyors, architects, etc. You will need to make this almost a full time job.

divide house subdivision

Buy and Sell

PROS

A simpler version of the buy, renovate and sell example above only that you don’t have to renovate. You simply buy, hold and sell for profit. This can be a great strategy in a fast upwardly moving market.

CONS

Once again, transaction costs make this a very difficult strategy to profit from. You need your property to increase around $40,000 in value before you will even break even. This is on average one year’s capital gain. This strategy also relies on a number of external factors like availability of finance and market fluctuations. This type of strategy is more suited to an experienced investor.

 

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Buy, Renovate and Sell or Hold

PROS

The ‘Buy, renovate and sell or hold’ strategy can maximize potential gain by improving areas of the property that are unsightly such as an un-landscaped front yard, a messy entrance way, a run-down bathroom or kitchen. This is a good strategy for those with the time and skills (i.e. tradesmen or women) that can complete the renovation themselves.

It is an exceptionally good strategy for those that have the lifestyle suitable to living in the property for a year or more, whilst they renovate it, and then sell it.

CONS

The main disadvantage of this strategy is the chance of getting it wrong and making a loss. Transaction costs are another major disadvantage of this strategy.  In a market moving quickly upwards, good profits can be made. In a slower moving market you need to make serious gains on your improvements just to cover the transaction costs.

BEWARE THE TAX MAN

If you use this strategy too often you might lose your capital gains exemption. You could also be viewed by the tax man as a property developer and lose the capital gains 50% exemption. A bad outcome – so seek professional advice.

“Adding value by carrying out improvements needs to be carefully planned and executed. Not everything adds value. It is easy to over-capitalize and not get your money back. What you do need to be is market appropriate.”

 

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