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Do people know how to calculate the profit on a trade? How much profit should you ma

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  • Do people know how to calculate the profit on a trade? How much profit should you ma

    I’ve seen a couple of postings on PT showing ‘great’ deals for trading. But after a quick look they seem hopeless. So I was wondering if everyone understands how to calculate the profit on a Trade?

    Also how much profit should you make (before tax) on a trade. Obviously if you are assigning you incur no costs and limited risks, so any profit/fee is great. But is it worth buying a house for $250,000 and selling to only make $5,000 before tax? Do you need $10,000, or $20,000 or is there a certain percentage return?

    Tips on calculating Profit!

    1) All figures should be GST exclusive (just like in a normal business) – I use divide by 1.125. Interest, loan fees, bank fees don’t have GST, so they are already GST exclusive

    2) I work on the worst case, so for example I always put real estate commission as a cost.

    3) Set up a simple excel spreadsheet so that you can quickly put in the numbers and calculate the profit.

    4) Remember to include holding costs being mainly interest, but also rates, insurance etc. It may take you a month to sell the property (once settled) and then another month or more for them to settle.

    So, buy at $200,000 and sell at $270,000, what is the true profit.

    a) Selling price $270,000 less GST = $240,000 excluding GST

    b) Costs that include GST
    Purchase Price $200,000
    Legal fees to buy $1,000
    Renovation costs $10,000
    Legal fees to sell $1,000
    Advertising $1,000
    Insurance $100
    Rates $300
    Other $1,000
    Commission on sale at 4% + GST = $12,150

    Total costs that include GST = $226,550
    Then less GST = $201,378 excluding GST

    c) Costs with no GST
    Bank fees $50
    Loan fee $500
    Interest $200,000 at 9.5% for 3 months = $4,750

    Total costs with no GST = $5,300

    Total all costs excluding GST = $206,678

    Net profit before tax = $240,000 - $206,678 = $33,322

    Tax at 33% = $10,996.26

    Net profit after tax (cash in your hand) = $22,325.74


    Lastly for each trade you then need to review is this profit worth the risk, hassle etc. In this case I would say yes, but if it was only $5,000 left at the end I probably won’t bother? What about other investors?

    Ross



    Book a free chat here
    Ross Barnett - Property Accountant

  • #2
    Hello Ross,

    Are you able to point to one of two areas where a trader's costs may easily exceed the figures you quote, thus reducing the nett profit even further?

    xris

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    • #3
      My minimum threshold is 50K gross margin on any deal, usually 100K now!!

      Comment


      • #4
        Originally posted by xris View Post
        Hello Ross,

        Are you able to point to one of two areas where a trader's costs may easily exceed the figures you quote, thus reducing the nett profit even further?

        xris
        There are normally two main areas, holding costs and renovation costs. The worst trades I have seen are the major renovations, that end up costing way more and taking a lot longer then expected. One trader aimed to spend $30,000 adding a room and moving the kitchen, and taking 6 months. 14 months and over $50,000 later, he still hadn't finished or sold the property.

        So personally I would always go for quick and simple.

        Ross
        Book a free chat here
        Ross Barnett - Property Accountant

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        • #5
          Holding costs can easily blow out to 6 months or more. Renovation costs can have a significant variance as well.

          John

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          • #6
            Good post Rosco .. Just one thing. In your example you haven't claimed GST on the purchase price ?... also there may be some pre-purchase due diligence costs such as valuations and building reports etc.. Not that i am trying to be pedantic :-)
            Last edited by Emblaze Pete; 18-05-2007, 04:24 PM.

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            • #7
              Originally posted by Emblaze Pete View Post
              Good post Rosco .. Just one thing. In your example you havent claimed your GST on the purchase price ?
              Yes I have! Added up all costs that include GST (below) which add to $226,550. Then deducted GST being $25,172 (this is the GST claim on the purchase price plus other costs), leaving $201,378 being the GST exclusive cost!!

              I did exactly the same with the sales!! So by making everything GST exclusive, the GST claim and payment has been accounted for!

              Total costs that include GST = $226,550
              Then less GST = $201,378 excluding GST

              Ross
              Book a free chat here
              Ross Barnett - Property Accountant

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              • #8
                yes, sorry Rosco .. i shouldnt skim read where numbers are involved. Looks like you have captured all the relevant costs. A very good example!!
                Last edited by Emblaze Pete; 18-05-2007, 06:14 PM.

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                • #9
                  Yes Rosco your numbers are about right. It does show how a trader needs to be carefull they have enough equity in a deal. It certainly gets chewed up very quickly.

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                  • #10
                    Nice work on the numebrs Rosco. I see to many people purchase of a trade manipulate the sale price to make a deal work. I would say don't do that - get a valuer or highly experienced (and reliable) agents in the area to give you the likely sale price. Then work take off all of your costs (incl agents fees).

                    Why get out of bed for less than $30K on a trade when for deals less than this you assign or onsell this to another party, and there are plenty of deals out there with over $75K in them.

                    Comment


                    • #11
                      David brings a good point. Why trade a deal on small numbers with all the effort when you can just assign it for not much less profit.

                      Comment


                      • #12
                        building a list for quick flicks

                        I am interested in views on quick flicks.

                        Dean Leftus (Poomba) has built up a huge number of people he can flick properties on to through his mentoring, seminars, newsletter etc and his larger trades involve flicking on a development opportunity through an agent that has lots of developer contacts. Great.

                        But for us ordinary mortals it is not so easy.

                        For a starter, in my focus towns (Tauranga and Rotorua) there are not the big number development flicks. In Tauranga, builders are running scared of smaller scale apartment opportunities because no one is buying them.

                        Yes, there are smaller flicks - $5-10k - but how do you get a Poomba like list to flick them on to? If you resort to TradeMe, not only is this hit and miss but how do you show them the house if you have not settled? And who wants to settle on something that has so little margin in it for you, unless you want to do the renno?

                        And so that is where my trading is at - subdivides and rennos - and it is how a lot of traders are doing business.

                        But I would be interested to hear how other people have built up a list of contacts for the smaller margin flicks.

                        Comment


                        • #13
                          Great Gross Margin

                          Originally posted by pooomba View Post
                          My minimum threshold is 50K gross margin on any deal, usually 100K now!!
                          This is a fantastic threshold. In my opinion (and obviously pooomba's) its not worth doing a trade for under a 50K gross margin (ie buy for $250K and sell for $300K).

                          Why do 20 trades that make $5K each, when you can do one that makes $100K? A lot of small time traders waste all their time on the small deals. In my opinion a small deal takes basically the same time and effort to investigate as a large deal. So why not have a better lifestyle and just look for 1-5 bigger deals a year?

                          A common rule of business is that you make 80% of your money from the top 20% of your clients. The same probably applies to property trading. You make 80% of your profit from your best 20% of deals.

                          Ross
                          Book a free chat here
                          Ross Barnett - Property Accountant

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                          • #14
                            Hey Rosco - thanks for the awesome post! I could cross check your numbers to double check if my calculating was up to stratch!

                            I can't for the life of me get your numbers to EXACTLY match. Did you include the sale side legal fee? I'm $1050 out


                            Cheers mate

                            Slack
                            Baywide Dingo's_______ 0800 2 D I G H B
                            bringing out the best in your backyard...

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                            • #15
                              You have to start some where

                              Ask any property trader what was the profit on their first trade and how did they do it.

                              Often people start with doing, do-ups (themselves and often living in it) and then moving onto contemporaneous deals ( a more risky and skilled trading activity in my opinion)

                              My first trade was a do up, which I settled (holding costs of 2 months) and spend 2 weeks of 14 hours per day doing up, for a pre tax profit of $25K

                              We currnetly do contenporaneous deals with 10-35 K in them, but with no money down (our clients deposits pay for our deposits) and we buy and sell on the same day, using our purchasers money to settle (and then onsell) the property. And yes we have done the odd big deal.

                              For some, the big deals seems glamourous,but usually people build up to these deals in terms of skills and confidence

                              You have to think about who you are and what risks you are willing to take, to really decide if you'll walk past a 'not worth getting out of bed for ' $5k deal

                              I have a close friend who is in business with RM and 5-10K deals is how they started, for several years, doing 4 a week is not to be sneezed at IMHO!

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