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!
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?
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
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.