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**revdev** · 11-05-2006, 04:51 AM

Hi W24,

You have covered a few things here so I'll throw you my 2 cents worth for starters..

1. You are going unconditional on your first IP, which is a Buy/Do-up/Flick. Of primary importance is that BEFORE you purchase you have set up the right structure/entity.

2. Ask yourself plenty of questions - How much have you budgeted for the reno? How long do you anticipate the reno to take? What do you anticipate the ARV to be? What are similar houses in the area selling for? - know your selling range and work backwards. Given that you are purchasing with a low gross yeild of 6.4%, what would you be selling it on at?? This will be important to the next guy down the line, if they are investors also..i.e. what do you expect it to rent for after reno?

3. Stay away from the tenant helping with the renovations. Investing in IP is a business so treat it like one.

4. Hole in the wall - tenant should be talking with the vendor on this - it's not your house yet. Just make sure the vendor gets it fixed before settlement.

All the best W24

G

**xris** · 11-05-2006, 07:33 AM

Hello Waiopehu24,

I cannot stress more revdev’s points 3 and 4.

Do not use sitting tenants to do maintenance, especially if you do not really know them. It can be a recipe for disaster.

You should not settle until the hole issue is sorted out. It is entirely the vendor’s problem. Do not get involved in any way.

An important question: on the S&P do/did you have vacant possession or did you agree to take over the existing tenancy? What is the situation?

xris

**waiopehu24** · 11-05-2006, 07:37 AM

cheers,
my accountant says i should just buy it under my own name and to just make sure that my 'intention' is to buy and hold.
I have budgeted $7500 for the reno and have still to identify exactly what im going to do, get quotes for how much it'll cost and how long it will take.
I think your right actually it wont be such a good idea to have the tenent helping too much.
This is clearly not the deal of the century but I have to ask myself: if not now, then when? Ive been procrastinating too much and it is time to sink or swim.

Regards,
Sean

**SuperDad** · 11-05-2006, 07:37 AM

Hi Sean,

Well done on taking action and putting in a successful offer. From what I've read, that's a lot more than mose would be investors ever do. And you've bought below RV - not very far below, but it's better than buying at or above valuation.

Beofre I go on, a qualification. I am no "expert". I'm in the learning states, and don't yet own IP. My comments below are based on what I have learnt, and not (so much) on what I have done. Hopefully you will also get some more replies from seasoned investors, as you have from revdev.

Revdev makes four very good points. From what I know, the first point is crucial. What structure are you buying the unit into? (Your personal name, a LAQC, a trading trust?) As you mention that your intention is to buy, do-up and flick, I would hope that it is the latter. If not, my understanding is that you may have some big problems with the IRD. However, as I understand it, all is not lost if you ae buying into your personal name of a LAQC. I may be wrong, but if you buy the property, renovate it and then rent it for at least two years before selling, the IRD will not view you as a trader. (My evidence for this is the recent Treasury and Reserve Bank report on the housing market. See pages 5-6 of the latest NZ property magazine for a summary of this report.)

Revdev's points 2-4 speak for themselves.

Finally, you go unconditional TOMORROW!!! Do you have a condition in the S and P agreement that gives you an out? If, as a result of advice you receive between now and tomorrow, you realise that this property is not a good choice, what can you do? You have put this deal out for public consultation on this forum - if you receive feedback that you might be making a mistake, are you able to act on that feedback. (Do you even have the time to give full consideration to that feedback?) Like you, I put my first prospective IP purchase on this forum, for others to look over. I had a LOT of very helpful feedback from the many knowledgeable investors on this forum, and as a result my deal didn't go through. (For me, cashflow was the major issue. I adjusted my purchase price to a point where this issue was addressed, and my offer was too low for the vendor. I'm very happy with this outcome.)

Don't panic if it turns out that you have no "out" clause in the S and P, and you are committed to the purchase. Worrying will be no good at that point - there probably isn't much you can do. Focus on going forward, and focus on the positives. You have taken action! If there are negatives (e.g., cashflow, trading concerns), how will you be able to turn those into positives? (Maybe renovating will increase rental yield, and holding for a couple of years will get around trading concerns?)

Please keep us posted on the developments with this deal - I for one will be keen to hear of your experiences.

Kind regards, and very best with your investment decisions,

Paul.

**SuperDad** · 11-05-2006, 07:50 AM

Sean,

You wrote:

Originally posted by waiopehu24

cheers,
my accountant says i should just buy it under my own name and to just make sure that my 'intention' is to buy and hold...

This is clearly not the deal of the century but I have to ask myself: if not now, then when? Ive been procrastinating too much and it is time to sink or swim.

Regards,
Sean

1. Has your accountant advised you what the "hold" period is before you can sell without being considered a trader?

2. From what I have read, the deals are always out there. Don't act merely because you think you will miss the boat. Keiran Trass identifies investor greed at this stage of the property cycle as one of the main reasons investors come unstuck - they think they must get in NOW or else they will miss the boat, and so they make unwise decisions. To strain a metaphor: The boat is always there - its just more difficult to get on sometimes. You want to swim, not sink!

My two cents,

Paul.

**drelly** · 11-05-2006, 08:23 AM

Hi Wai,

Congrats on taking action!

However... I've got warning bells going off in my ears. Rev and Xris make some very valid points and when they read your last post, I expect they'll be back with more, so let me pre-empt them...

GET A NEW ACCOUNTANT!!! ...seriously. His advice is badly, badly flawed and could land you in hot water with the IRD. As you've clearly (and publicly) stated, your actual intention is to do up and sell for profit. What he is suggesting is tax evasion. There's plenty of other threads on here about trading property, so try doing some searches for more info.

Aside from that, you haven't mentioned what you think you'll be able to sell it for after your renovations? How much profit is there in it?

cheers,
Dave.

**JohnL** · 11-05-2006, 08:26 AM

The risk you run is being personally tainted as a trader, if the IRD take issue with you. This also taints your family. Probably a low risk if you only do one trade in your own name as they search for multiple signs of buying and selling.

Even so, its not the end of the world, but you would then need to set up your future buy and holds in a trust, structured in such a way that your tainting doesn't effect them. A LAQC (if thats the vehicle you wanted to use in the future) would be tainted by association and any future capital gains taxed.

You probably don't have time to set up a GST registered trading structure now. If you do, after you go unconditional and before you settle, then the IRD could decline your GST refund but still make you pay GST on the sale. This would definitely be a disaster!!!!

I would probably proceed in your position as the risks are low re the IRD questioning it, but I certainly wouldn't do two in my own name.

In terms of the numbers, I usually get an agent to give me an idea of what its worth done up. Then I work backwards and come up with a maximum purchase price. In a flat to decling market, you need to add in a factor to allow for the fact that the market may have dropped between buying and selling (a quick turn around helps to reduce this risk). Also the time to sell will slowly increase so holding costs will go up.

I have a couple in Tokoroa at the moment where the heat came out of the market and suddenly prices have come back $10K, so I'm going be lucky to break even.

John

**muppet** · 11-05-2006, 09:44 AM

Hi John

You said:
I

have a couple in Tokoroa at the moment where the heat came out of the market and suddenly prices have come back $10K, so I'm going be lucky to break even.

Ahhh, where has this information come from?

Friends of mine have bought and sold in the last three months and made 10k on the original buying price of 70k.

The cheaper houses are generally still roaring out of the door.

Regards

**cube** · 11-05-2006, 09:54 AM

GST in a very important leaver in the Trader's toolbox - the GST refund on purchase provides a substantial dollop of cash with which to pay for renovations, and the GST payment on selling should be well covered by the increase in value. At the end of the project, you end up paying GST on the profit that you make.

However, if your 'intention' is to buy and hold as per your accountant's advise, you won't have access to the GST refund. BUT if the IRD decide that you did trade (even after the fact, maybe for 7 years), the GST will be payable on the sale.

Your best 'exit' strategy at this point may well be to really buy and hold, and work on getting yourself set up correctly for the next one.

cube

**lissie** · 11-05-2006, 10:16 AM

Originally posted by waiopehu24

This is my first property purchase: I will do it up and sell it on. its a 2 bedroom ex state that has an identical unit (not part of the deal) joined next to it.

The secton is 496m2 and floor area is 80m2. I had a valuation come through at 135k and am purchasing for 130k.

It currently rents for 160pw.

It is pretty much structully sound but needs alot of cosmetic improvements before I resell it.
cheers,
sean

Hi Sean,
Totally agree with others who say get a new accountant and dont have the tenant help - but i wanted to comment on the renovation costs. We are just completeing a major renovation of a ex-state semi brick veneer in Wellington. The house was brick veneer -tile roof , the interior was sound and dated - 1960's dated . So it sounds like its similar to yours. Ours was structurally sound -the builder said the floor was absolutely straight - no movement at all . We had no unexpected surprises along the way. We have probably done more that you will so I have given you the actual buidling costs but some of the relevant costs may surprise you.

We extended from 55 to 65 m2 changed the property from 1 to 2 bed removed some interior walls moved some doors and gutted the bathroom and kitchen (without moving them). The costs will amount to, excluding interest but including everything including fees - are you sitting down? about $120k . Now we arent handy so we have only done gardening an curtains - but to give you a rough idea - paint insdie and out (only part because of the brick) about $8k - new kitchen cabinetary at Mitre 10 - $6500 . Appliances for kitchen including dishwasher $1500 . Electrical - needed re-wiring in the end yours will too unless its been done - about $8000. (that doesnt include lights but I went classy and spent $750 for the house load to make it look classier than downlights) Plumbing ditto - needed new pipes and a new HWC (the old one was dated 1958 ) about the same Council fees - $1500 - thats the only one that really pisses me off! Floor sanding - you probably have beautiful floors too - $3000.

Obviously you can save heaps if you do it yourself - but if you take longer (which is not a given given the shortage of trades at the moment) - you loose rent.

We last renovated about 5 years ago and the costs have gone way up since then. BTW we are bloody happy with the result - just have to wait for the valuation now - but I am confident! As some one else said check what the comparable prices are in the area and dont go over this - we are doing this in an upmarket suburb inWellington so are not worried about over-capitalising - you may need to be more cautious in PN . Have fun.

**FreezingandHot** · 11-05-2006, 10:35 AM

Hi Lissie

Just interested to know your profit margin on this property? What you brought if for and what you intend to sell for. It sounds as if you have done a thorough job of this property.

Just wanted to know if the outcome will be favourable to you.

FH

**NZGEMS** · 11-05-2006, 12:14 PM

Hi Sean
You have had some great advise here and I agree with it all. CAN YOU GET OUT OF THE CONTRACT? The reason i ask is if you really do want to onsell this after doing it up and make a habit of it you really do need to register for GST and pay income tax on the profit you also NEED an entity, your accountant is really behind the times i am sorry, you told us it is your first trade, did you tell him that? If you plan to make a habit of trading which it sounds like it is your intention you need to be registered. And if you change your mind you have wasted your money setting up too which is what your accountant is probably working on, that you will only do one. SO make up your mind and start how you intend to carry on. I would think this is not a good deal you have bought, You make your money when you buy (my personal rules) so if you have not bought this below value which you havent you run the risk of loosing on it. Trading is flavour of the month right now and the IRD are really onto people doing it, they probably have someone monitoring this site too I would bet, and that is fine, because we are all trying to do things right so we have nothing to hide. That is why we are giving you this advise.

you really need to buy into a trading entity from the start,I do know of people who have not claimed gst, done some trading and been made to pay it on the sale, this was done innociently too but the IRD did catch up with them.

also what do you plan to do to your house to "do it up" ? you dont mention that, you have only budgted $7500 that wont go very far. you really need to have worked this out before you go ahead with a deal. and what will the house be worth once that work is completed. we are heading into a phase where property prices will slow and in some cases even come back a bit so you could find your house is worth no more once the work is done.

Good on you for taking action and good on you for posting on this forum. you have learned heaps from it i am sure.

if you are planning on doing the work ont he house yourself it will probably work out ok depending on what you are going to do. IT is really expensive to get others to do it beleive me I do alot of them and 7.5k can go no where. I only do minor stuff too. I leave the big jobs to the big boys.

SO my advise would be to let this one go if you can, do your sums property, resitster a gst trading entity and then if the house is still there and your numbers work ok you can purchase it again. Or a better deal may have come along.

Best of luck, and if you are committed dont panic, perhaps it would be best kept as a buy and hold if you want to do it in your own name. and you can look at trading a different one once you are set up properly.

Robyn

**SuperDad** · 11-05-2006, 01:03 PM

Hi again Sean,

I've been thinking a bit more about your purchase.

Hopefully you have not been too disheartened by the reponses to your original posting. If it turns out that you are committed to the deal, and you are considering selling for a profit without the appropriate structure (trading trust), then I'm sure that the replies have not been what you wanted to hear. But they are what you needed to hear.

If I were in this situation, then I would proceed in one of the following two ways.

I. I would keep the property as a buy-and-hold, as others have suggested. The upside of this is that you are now in the PI game, and you will gain valuable knowledge about property management and tenancy issues. The downside of this is that it seems that you might have cashflow problems, which will affect future borrowing ability. (I say this without knowing anything of your personal situation or the property, other than what is on your public profile and on this thread. Maybe the rent after renos will increase the yield to a satisfactory point?)

2. My preferred course of action, were I in this situation, would be to look for ways to move forward post-purchase. Hopefully others will be able to help with suggestions here - my thoughts are just my thoughts.

Perhaps you could sell the unit again, by way of private sale, for what you paid for it. I'm not sure, but this MIGHT get you out of the IRDs firing line. After all, you would not have sold for a profit. (The reason I suggest private sale is that there are no agent's fees involved, which would inflate the price in order to recoupe your original investment, which might in turn constitute "selling for a profit".) Intentions can change - your intention on purchase was presumably to sell for a profit, but in light of information you have received perhaps you are thinking differently now? Maybe you could even contact the IRD and explain your situation, and ask for advice. From what I've read on this forum, the IRD are not out to get us unless we do something that is not kosher.

I'm not sure that this would work - I'm hoping other forumites might be able to tell you whether this is a possible fix to your situation.

Then, with your freed equity, you can start again with the right structures in place. And as others have mentioned, equity is made on purchase by buying at well below market value. Also, you would have more time to properly research the renovation costs, in light of suggestions on this thread.

I don't mean to offend if I have made certain assumptions about your situation that are not true (e.g., perhaps you have proerly researched the reno costs, and the value and yield of the property after renos). I'm just trying to be constructive, as all of the others are.

Best wishes,

Paul.

**revdev** · 11-05-2006, 04:00 PM

Hi Sean,

Well mate you have had the full benefit of this website in about 20 replies and over 1 day. Put your thinking cap on bud and work out your moves from here.

You have been given some very average advice by your accountant - but believe me you are not alone with this one. Cut him loose and get another.

If you don't have an exit strategy for this deal, or you want to push through with it, it may pay to change tack. Cube and Robyn have mentioned switching to buy & hold...if you can handle the cashflow, this is good advice as trading in your current setup is all bad.

Let us know how you get on.

All the best
G

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