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!