Last month the latest edition of “The Block” television program ended with the houses that the four contestants renovated being auctioned on the open market.
The results were mixed. Two houses sold for a profit of $25,000 and $27,000, one made a profit of $66,000 and the winner pocketed $181,000. The results were very interesting for a variety of reasons, and provide what I think are good lessons for property investors’.
The first lesson is that there is definitely money to be made in doing up older properties through adding value. This is a time honoured way for investors to add value to property and increase their potential to buy more property.
The second lesson is that success in a do-up is never guaranteed. The Block winners made a profit margin of 19%, but the margin for the others were 7%, 2.9% and 2.7%. This does not leave a lot of room for error and demonstrates that it doesn’t take much for a profit to become a loss. Consideration also needs to be considered for the time that the contestants put into the renovation. In this case it took 10 weeks. A couple contestant took all this time off work and noted that even with a $25,000 profit they still took a hit in the back pocket.
It was interesting to note that the winners, Alice and Caleb Pearson, had already renovated three properties on a tight budget before appearing on The Block. Experience is a definite advantage to achieving profitable success in renovations.
The final point to note is that these four contestants are really property traders. While the TV program focussed on the profit they made, in the real world they would have been liable for tax on this profit. This is a point that I wish had been made, as the program continued to advance the myth that property traders don’t pay tax.
This is an issue that the NZPIF has been battling for years. Property investors’ are not property traders. There operating model is completely different and they are taxed differently because of this.
A trader would sell the property once it is renovated and any profit is treated as income. The investor would keep the property and hopefully make a higher rental return from it because of the renovations.
By taking a long term view of the investment, being an investor is less risky in my opinion than being a trader. If you need to sell a property to put food on the table then a low profit margin is risky. If you don’t have to sell a property to put food on the table then less risk is involved and there is always the potential for capital growth in the future. You don’t get that if you buy and sell.
As this is the last issue for the year, I hope you have had a successful 2013 and enjoy the Christmas break ahead. All the best with your investments in the coming year.
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