Renovating for fun and profit



Toby Johnstone in the Sydney Morning Herald is at it again, suggesting renovating for profit in Sydney makes sense. On September 8 he profiled 50 Princes Street Bexley where a bright-eyed couple spent 5 years reclaiming a ‘swamp’. The property is now for sale at $630-680,000. The higher figure is probably the real vendor expectation.

Let’s look at the sums:

Purchase price 495 000
Stamp Duty 17 785
Renovations 94 580
Selling costs 20 400
Total outgoings 627 765


Assuming selling agent and advertising is 3% of sale.

Disregards: building permits, property selection, labor contribution of owners, legal costs, interest expenses and offsetting rent saving.

Will this lucky couple pocket a tax free $50,000? Maybe. But this is the wrong question. A better one would be: what is the real opportunity cost, what did they give up?

Mr Woods and Ms Fu paid out $607 365 in cold hard cash (leaving sales costs to the end). The most conservative measure of opportunity cost is the price of mortgage finance – say, 7.5 per cent a year ($30,368) for five years, or $151,840.

Did they make $50,000 or lose $100,000? Their accountant and I think they lost nearly $400 a week for 5 years while living in an unrenovated dump. Shudder!

Who profited? The vendor who sold a ‘swamp’ for more than it was worth, the RE agents who sold the property twice and, the NSW government which made Stamp Duty twice without lifting a finger. Each took real money off Mr Wood and Ms Fu.

Don’t Buy Now!

3 Comments

  1. Thompson Cromwell15-09-2012

    That Bexley house sold at auction today for $795K.

    See here… http://goo.gl/W9eJr

    Sale price was well above expectations.

    Looks like the vendors made a pretty good profit.

    A sign of underlying housing market strength?

  2. Forrest Gump16-09-2012

    I see that another web site is spruiking this as a positive outcome. But here is my take on it.

    Purchase Price $495,000
    Held for 5 years while renovating the property including removal of rising damp, roofing mods and a host of other mods based on the “Swap” location.

    Outgoings:
    Stamp Duty: $18,000
    Legals (Buy & Sell) $10,000
    Agents comission: $20,400
    Interest over 5 years $100,000
    Renovation cost 94,600
    Rates over 5 years: $5,000
    Insurances over 5 years: $3,000

    Total expenses including the house = $745,000
    Sale Price (unconfirmed) $795,000

    Unconfirmed gross profit $49,000.

    This excludes, loss of income over the 5 years taken to renovate the property-for 2 people. (Assume its a full time 3 month project resulting in loss of wages for this period) $20,000 (conservative)

    This excludes the loss of the interest on thier inital deposit that was probably invested (say $10,000 over 5 years)

    I make the net profit a conservative $15,000 over 5 years. Assuming they had the cash for the renovations and no loan was required.

    i.e. These 2 people were paid $3,000 a year to live in a swamp house….Food for thought

  3. peter fraser16-09-2012

    Oh Dear, that’s a bit embarrassing David? Perhaps in future you should wait until AFTER the sale before you write these sort of posts. That way you can disregard the sales that make a profit, and just use ones that make a loss to back your claims.

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