My "Trade" calculations stand up?

[Niall]

Hello again everyone.

I am on to a new possible deal after my last offer 2 weeks ago was unsuccessful. It is a renovate and trade situation and would appreciate comments on my calculations below.

Description. 2 flat property on corner site in Northern Wellington. One up and one down. Duel access from 2 streets. Both off street parking. Currently configured 2x2. Cosmetic surgery only required, repaint, kitchen and bathroom modernising. Rear of upper flat backs onto land as built on a slope. This could be easily cleared and tidyed to give outside living. Opportunity for Deck off upper flat also.


I have put together a spreadsheet using examples from various posts I have read and on the forum. While I am 90% confident I have the correct calculations below it dosnt help to be either confirmed or put straight.

Purchase price $325k
GST refund $36,111………..ie 1/9th of purchase price
Renovations $35k…………..using 10% of pp max
Holding Costs $10k
Prof Fees $5k
Sell at $450k

Gross Profit of $113,661…….ie Sell price + GST refund (450000+36111)– renos/holding costs/fees/purchase price (32500k+10k+5k+325K)
Agen Fee $18k (4%)
GST on Sale $50,000…………ie 1/9th of sale price
Taxable Income $45,661.............ie $113,661 minus 18k minus 50k
Capital Gains Tax $ 15,052 (33% of Gross profit minus expenses, agent and gst. Correct me if wrong)

Net Profit $30,559.


If my calculations are correct then I can use them from now on. If I have misjudged somthing them please shout loudly.

Myself and my wife met with Garth Melville yesterday in Auckland and are in the process of setting up GSt registerstration/trading trust etc.

Very nice bloke who shouted us lunch and feels like a very good contact to have found. Will be using his experience to grow our own and looking forward to it.


Looking forward to your thoughts.


Rgds,

Niall

[SuperDad]

Hi Niall,

This looks like a healthy profit.

A couple of points on the figures. The RE agents fees seem high, as you have calculated them at a flat rate of 4%. Normally, the fee is 4% on the first $250K, and 2% thereafter (or something like that). this being the case, agent's fees will come to $14K, not $18K. However, the tax on the income (which is not really a CGT) is levied at the marginal rate for the entity doing the trade. If it is a trust, this rate will be a flat 33%. So you will pay a bit more tax than you have allowed for.

I haven't done any trades myself, but I will at some stage. I would be happy to clear $30K from a trade!

Paul.

[Niall]

HI Paul,

Thanks for your thoughts. I had used th 4% real estate fee as I felt easier slightly overestimating the fees rather than underestimating.

As for the CGT. Its a typo by myself I am afraid. I had actually ment to calculate for 33% but wrote 30% for some reason and thus my profit was slightly out. I have amended that now.

Of course the profit is subject to actually selling at or close the After renovation value.

I will be getting a valuer to give an "as is" and an "after renovation" valuation if my bid is accepted.

Is everyone comfortable with how I have calculated these figures?

Am I correct to calculate CGT (tax on income) on the figure left after subtracting GST and Sale fees from my Gross profit?

Rgds,

Niall

[moovet]

Niall,

My spreadsheet works out the net profit at 24.7K. Thats assuming a high 4% agents fee overall as you have calculated. I think that is mainly because you have claimed GST on purchase price being GST exclusive rather than inclusive. In effect the total price you actually paid is 100% + 12.5% GST (=112.5%). Therefore you need to divide your purchase price 325K by 1.125 (=112.5%) and subtract that from your purchase price (dividing purchase price by 9 gives the same answer) to get the GST recovered which is 36K not 40K. eg 325k/1.125 = 289K, 325K- 289K= 36K or 325/9 = 36K (much easier!!)


Still a good margin though. Let us know what the valuations come back as.

Cheers,


Geoff

[Gatekeeper]

2x2br at $450k seems a lot. Who will be your target market? If it's a PI, will the rent increase after reno be viable?

[Niall]

Hi Geoff,

I had just finished writing my "It must be late as I dont understand what you are saying" when eureka. I see the flaw in my GST inclusive/exclusive calculation.

I had been multiplying the purchase price by .125 and Only now I realise this figure is different to the 1/9.

I will amend my initial post in the morning. Thanks for getting my head straight.

You are quite correct that the GST rebate on a purchase price is $36,111. I take it that when calculating the GST on sale price its the same storey. ie 450k/9 = $50k as opposed 450k*.125 = $56250 as in my initial post.

Gatekeeper

3 bed homes in the area range in price from $280k to $380k.

For examample There is an identical home on the next block with a Government value of $340k.

Current rent is $300 combined per week. apprasials will come in in the region of $550 per week after renos as 2X2.

For your question "what is your target market"

Mainly Investors with attraction of Subdividable potential and precident round the corner

Possibly homebuyers as a Home and Income.

Also investment companies who source properties for 1st time investors.


Are these pretty naive assumptions? On trying to get in place a decent spreadsheet to help calculate returns and costs it seems like I have taken my eye off the goal. Actually selling the thing when finished!!!

I should go to bed now as I am getting a bit dippy.

Thanks for your comments/questions.

Rgds,

Niall

[Niall]

Okay people,

I have updated my initial post with current calculations.

I now see a return of $30,559 on renovation if sold for $450,000.

My offer of $325,000 will be subject to ARV.

I intend only to take on trades that I can get a net $20k in my hand after transaction complete. For this to happen with a purchase price of $325k i would need to sell property for a minimum $431,500. This reduces to a minimum sale price of $$413,000 if I sell via a private sale.


If ARV does indeed come in at $450k then I can advertise the property at between 5 and 10% discount on RV depending on my sale method.

Wheather the bid is accepted or not I am really loving the thrill of it.

Rgds,

Niall

[Stevegoodey]

.
For your question "what is your target market"

Investment companies who source properties for 1st time investors.

Hi Niall,

This sounds like a nice little deal, I'd be happy to help you figure out if it will conform to the criterior of the above sale's method if that would help?

PM me and we can discuss.

Cheers

Steve

[Niall]

Update

Hey People,

Though I would update you on this transaction. It has fallen by the wayside. Vendors were unwilling to budge under $340k so withdrew and on to the next property.

Was interesting talking to the local valuers. Using the Cap rate in the area as discussed with valuers the arv when at market rent would have been int the $440 to $480k. so my initial guestimate of ARV was pretty accurate. We had also intended on adding a bedroom upstairs cutting into an overly large living area.

Are already looking at 2 offeres we viewed over the weekend in the Eastern Suburbs.

Onwards and Upwards.

Rgds,

Niall

[moovet]

Dont give up on this one. Check back with the agent every week to see how its going. People's motivation changes. Also contact the owners and ask when their contract with the agent is due to close and make a private offer then.

[Niall]

Funny you should say that Moovet. The agents rang me today to see If I had reconsidered.

I dont believe the vendors are in any rush to sell as its the second time in 6 months they have listed with the same agent and are not interested in advertising it.

Anywho the know where I am.

Rgds,

Niall

[payjisan]

Just a quick question - how does the GST refund process work? (Nice figures by the way, very educational )

Many thanks~

[Niall]

Hi payjisan,

It can be quite a scary process if not done properly. Fines are quiet substantial.

Step 1. Set up GST Registered entity.
Step 2. Go Undonditional on a property
Step 3. Fill our GST refund request and send to IRD
Step 4. Renovate the property using the GST Refund
Step 5. Sell the propety
Step 6. Pay 12.5% of sale price to IRD
Step 7. Pay Tax on Net profit of transaction.


Howevery I have been told that an your first GST refund request could take up to 3 months to process as the IRD audit you.

They can also audit on a pretty regular basis from posts I have read here.

Rgds,

Niall

[payjisan]

Evening Niall, thanks for the quick reply~ Thats great info. I can see that having to wait 3 months after going unconditional in order to get the refund back for renos would prove financially stretching. Does this mean that ones first IP purchase should perhaps not be a do-up/sell? Also can you still claim GST on buy-and- holds?? (i'm thinking that as they would be in a different entity to the trades then maybe not a good idea.....?)

thanks~

[Niall]

Hi payjisan,

We are both a pair of Nightowls

You can claim GST on a buy and hold. Only when your intention is to on sell.

Your buy and holds need to be seperate to any trading of property you do. Do a search for the word Tainting in the forums and you will come up with lots of chat regarding that.

Basically all your properties (be they buy and hold or trades) could ,when sold, be due to pay 12.5% of sale price to IRD if all in same entity/name. Even if you didnt claim GST on the purchase price. Lots of $$$ and tears then.

Well there is nothing wrong with waiting 3 months for a refund cheque as such. You would hope to have the funds avail to renovate immediatly if you were looking to sell. However nothing wrong with renting the place out untill refund comes thru if you are needing the refund to carry out refurbs.

Off to bed now.

Niall