Property trading vs usable equity?

[Mantaray]

Hi everyone,

This may come as a very straight forward question for most, but I was just reading treewx's thread regarding quitting their day job to invest full time, and noticed that property trading came up very often.

I assume property trading is buying, doing up, and selling on for a profit? If this is the case, would it not be more beneficial to have the property revalued and use the equity created to buy another property?

Again, apologies if this is super basic for most, but I'm only just getting started on my journey.

Thanks

[Bingo85]

My thoughts are that sometimes the property you have done up may not have a very good yield but appeal to an owner occupier hence why you would sell on.

[Damap]

Mantaray trading means buying and then selling for more. It doesn't have to have anything to do with renovations although you can do that as well.
As to the other point most people trade for INCOME. Their buy and hold portfolio is for long term investment but trading stock is just that, stock.
Most of us once we have enough passive income stop trading as it has inherent risk.
If you can keep buying and refinancing deals and they are cash positive then yes you are right just do that. However the buying rules for trading are completely different than buy and hold so they are rarely transferable.

[grip]

Bingo I believe most traders would revalue and use the equity if they could. Problem is the bank won't lend you more for your next deal.
Give you an example
you buy a do-up for 500k (which is practically impossible in Auckland for standalone house but let's run with this). You do this up and property revalues to 600k, after spending 40k.
Youve made 60k. Congrats. Problem you have is that the gross yield on this property is only 5%. Barely covering interest.

So revaluing this would still make it tricky for you to buy another property at the same gross yield. You're simply maxed out in terms of serviceability.
This is why people sell, to take out the cash to then do the next deal.
Problem with trading is that the selling costs eat into your trading gains so you end up with far less than most people think. Hence long term, buy and hold is usually a better strategy for wealth building.
As long as the bank is willing to lend you money.

[donna]

Lots of investors love property trading - and it's their job. They get a buzz out of it so it's not always true they're trading 'cos they can not get buy and holds. I'd guess most have some buy and holds for the longer term strategy. Just like any job there are unavoidable costs - tax takes a large chunk. In other discussions on trading on here it seems you probably end up with 40 or 50% of the gross profit and that's actually pretty good. Most businesses would be over the moon if they could achieve that I suspect. It's all about perspective. If you run a business you know what's realistic in take home income - if not i.e. you're salaried I suspect your focus is too much on what you don't get rather than what you do.

cheers,

Donna

[primal]

And if the capital value doesn't grow as you expected than you may have to wait for another few months till it's equity grows so you can use this equity to purchase another property.

[orion]

Hi everyone,

This may come as a very straight forward question for most, but I was just reading treewx's thread regarding quitting their day job to invest full time, and noticed that property trading came up very often.

I assume property trading is buying, doing up, and selling on for a profit? If this is the case, would it not be more beneficial to have the property revalued and use the equity created to buy another property?

Again, apologies if this is super basic for most, but I'm only just getting started on my journey.

Thanks

Hi Mantaray,

Yes as Dean said trading can be a reno and sell, or just buying something that doesn’t need work that you buy below value, and sell on again either to another investor, privately or through an agent.

As others have said the disadvantage of doing this is that you lose half the profit in tax, and more if you sell through an agent.
There are times when it still makes sense to do trades though.

In most investors experience over a long time frame, there will be those times when they want more cashflow for themselves or to satisfy their bank, and sometimes both. At other times the investor will want quick cash, or an income that trading can give them.

So if they are wanting quick cash, trading is very good for this if done well, even after you pay all the expenses etc.

The other times it makes sense to do a trade/reno is when the property you are looking at isn’t suitable for a buy and hold.
It could be in a location which you wouldn’t normally buy a rental in (bad street etc), as in you wouldn’t attract the same sort of tenant as the rest of your properties, or a more expensive property that may be in a better location and if you did rent it out, the yield would be too low to make it work for your portfolio.

Last year I bought one to reno and trade in a street I wouldn’t want to have any long term rentals in.
It was a private sale and bought for $63k, I spent about $5k on it and sold for $95k through an agent. Overall profit was just over $20k after real estate fees minus tax, so not a huge profit but still worth doing and didn’t take much time to organise.
Another one that I bought to trade at the beginning of this year was in a good part of Napier for $262k, I spent $11k on painting the inside, fence and a few other things, it sold for $325k through an agent and the profit was about $40k after real estate fees, and tax comes out of that. If that one had been kept as a rental, the yield would have been around 6.5% so way too low for me to consider keeping as a buy and hold.

Both of those were bought as trades/renos because the location and type of property wasn’t suitable for me in my long term holds.

You do get times when it could be either and before you settle, you need to work out if it’s going to be a trade or hold as you should have a different entity of course for each.

One I settled on in August this year in Napier could easily have suited being both, and I chose to do a quick reno and sell so it went into my trading entity.
I paid $152,500 and spent $5,500 on it and sold for $197,500 through an agent. Profit after real estate fees was $31,000, so tax will be paid on that.

Another one that was just bought this week was $162,500 and the market value is approx $200k. It needs nothing done to it and I did consider selling it straight away, and even selling through an agent the profit would be just over $25k.
I decided though because the location and type of property that it is, it really suits being a rental and will rent for $320p.w. which is a bit over 10% yield.
This makes it still cashflow positive on a 20yr P & I loan borrowing 100%.
It also gets paid off by the tenants, so effectively it costs me nothing (no deposit) and at the end I still have a property with no debt that produces income of $1,100 a month (in today’s money) after expenses (not including any maintenance).

Sometimes a property can be suitable for both, to hold as a rental, or to trade/reno and make some dollars from.
With these last two examples I could have easily chosen to do them the other way around, i.e. kept the first one and sold the other one. I could have also chosen to sell both or keep both, sometimes it’s just a matter of choosing and often it’s pretty much a 50/50 choice.
The most sensible thing to do is of course hold them, but sometimes as mentioned if you need extra income quickly it may make more sense to sell on again.
Also when you have enough in your portfolio where you don’t need any more properties, then you may choose to do a lot more renos/trades and use the money to pay down debt on the others.

[donna]

Graeme would you have your buy and holds company and property trades company in the same trading trust? I.e. if you were considering starting trading and set up a company would you put in an existing trust has other businesses in it and and a buy and hold ip company?

cheers,

Donna

[orion]

Graeme would you have your buy and holds company and property trades company in the same trading trust? I.e. if you were considering starting trading and set up a company would you put in an existing trust has other businesses in it and and a buy and hold ip company?

cheers,

Donna

It's more of a structure question Donna, and depends on what your intentions long term are.

That's why a plan, rules and a good strategy are important to organise before you do too much.

I have 2 residential holding trusts, also a commercial trust and a company for doing trades in.

I used to have another for trading but closed that one a couple of years ago as one was enough. If you are doing more than $2 million of trades in one year (I think it is) then it's best to have another company as the GST is treated on the invoice basis after that from memory.

When I owned Mr Rental, that was also in a separate company.

Best to figure out what your plans are and go to a good structure person to set up what's best for you.

[Orkibi]

My thoughts are that sometimes the property you have done up may not have a very good yield but appeal to an owner occupier hence why you would sell on.

Bingo85, when I started trading few years ago now I was trading only investment stock, home and incomes and blocks of flats mainly. As it was easy for me to understand the numbers. Ie. What yields investor want in some areas. I was looking for buy and hold myself too, so whatever didn't meet my criteria I traded.
Also, at some stage i could no longer borrow so I kept trading.

nowadays I 90% trade to home buyers, mainly houses and large flats....


I think the above posts answer the main question.

[Bingo85]

Cool thanks, yeah I understood that. I was just saying one of the many scenarios in which someone would prefer to sell a property rather than keep it in their portfolio.

[Mantaray]

Hi Mantaray,

Yes as Dean said trading can be a reno and sell, or just buying something that doesn’t need work that you buy below value, and sell on again either to another investor, privately or through an agent.

As others have said the disadvantage of doing this is that you lose half the profit in tax, and more if you sell through an agent.
There are times when it still makes sense to do trades though.

In most investors experience over a long time frame, there will be those times when they want more cashflow for themselves or to satisfy their bank, and sometimes both. At other times the investor will want quick cash, or an income that trading can give them.

So if they are wanting quick cash, trading is very good for this if done well, even after you pay all the expenses etc.

The other times it makes sense to do a trade/reno is when the property you are looking at isn’t suitable for a buy and hold.
It could be in a location which you wouldn’t normally buy a rental in (bad street etc), as in you wouldn’t attract the same sort of tenant as the rest of your properties, or a more expensive property that may be in a better location and if you did rent it out, the yield would be too low to make it work for your portfolio.

Last year I bought one to reno and trade in a street I wouldn’t want to have any long term rentals in.
It was a private sale and bought for $63k, I spent about $5k on it and sold for $95k through an agent. Overall profit was just over $20k after real estate fees minus tax, so not a huge profit but still worth doing and didn’t take much time to organise.
Another one that I bought to trade at the beginning of this year was in a good part of Napier for $262k, I spent $11k on painting the inside, fence and a few other things, it sold for $325k through an agent and the profit was about $40k after real estate fees, and tax comes out of that. If that one had been kept as a rental, the yield would have been around 6.5% so way too low for me to consider keeping as a buy and hold.

Both of those were bought as trades/renos because the location and type of property wasn’t suitable for me in my long term holds.

You do get times when it could be either and before you settle, you need to work out if it’s going to be a trade or hold as you should have a different entity of course for each.

One I settled on in August this year in Napier could easily have suited being both, and I chose to do a quick reno and sell so it went into my trading entity.
I paid $152,500 and spent $5,500 on it and sold for $197,500 through an agent. Profit after real estate fees was $31,000, so tax will be paid on that.

Another one that was just bought this week was $162,500 and the market value is approx $200k. It needs nothing done to it and I did consider selling it straight away, and even selling through an agent the profit would be just over $25k.
I decided though because the location and type of property that it is, it really suits being a rental and will rent for $320p.w. which is a bit over 10% yield.
This makes it still cashflow positive on a 20yr P & I loan borrowing 100%.
It also gets paid off by the tenants, so effectively it costs me nothing (no deposit) and at the end I still have a property with no debt that produces income of $1,100 a month (in today’s money) after expenses (not including any maintenance).

Sometimes a property can be suitable for both, to hold as a rental, or to trade/reno and make some dollars from.
With these last two examples I could have easily chosen to do them the other way around, i.e. kept the first one and sold the other one. I could have also chosen to sell both or keep both, sometimes it’s just a matter of choosing and often it’s pretty much a 50/50 choice.
The most sensible thing to do is of course hold them, but sometimes as mentioned if you need extra income quickly it may make more sense to sell on again.
Also when you have enough in your portfolio where you don’t need any more properties, then you may choose to do a lot more renos/trades and use the money to pay down debt on the others.

Thank-you greatly for your reply. Brilliant explanation.

And thanks all who contributed. Answered my question

[kowhai]

Trade vs Hold Ownership Stuctures?

Hi Orion, I was thinking of having long term hold properties in my own name, and trade properties set up in a company. Yes this is more risky than other entities but do you think it makes a clear delineation to the IRD as to the properties you pay tax on at sale (trade properties) vs the ones you bought to hold? Any suggestions for what are the best structures to have for hold and trade property portfolios, respectively? We are not big time in the property thing yet, so I am unsure if the expense of trusts or anything fancy is worth it?
Thanks to anybody for your opinions

[Wayne]

You will be tainted which ever way you try to go.
So you will have to be more careful with your holds that you hold long enough.

[kowhai]

Thanks Wayne, so how do you best avoid becoming tainted in terms of structure? Any links to info about tainting and its implications? Thanks