Not understanding the trading numbers
Disclaimer: Nothing is this article is meant to constitute financial advice of any kind, and is the opinion of the author only. Seek professional advice before making any financial decision.
The most important aspect in property investing, particularly trading, is understanding the numbers.
Let’s face it, we are dealing with some pretty big dollars. Dollars which have taken us a long time to accumulate and we want to see them increase, not decrease.
When I started out in property investing, I was wowed by the big profit’s traders were getting in the mentoring programme I joined.
It all seemed so easy, you buy a house, you spend some money on the renovation and then you sell it and there is your profit. The hardest part seemed to be securing a deal. It wasn’t until we entered into our first deal that it reality hit!
We purchased Mikasa Pl, Mangere in March 2015 for $460,000.
We settled the house and all the bills started coming in. I soon learned that there are many costs to holding a property. Loan set up fee, mortgage broker fee, solicitor fees for buying and selling, insurance, rates, power, water, mortgage discharge, interest on the mortgage and maybe even interest on your deposit and renovation costs depending on what money you are using.
Then you have your selling fees. Agency fees, organising a LIM if you choose to, private selling fees or staging costs if you stage your property.
Lastly you have the GST to pay. This is the GST on the difference between the purchase price (excl GST) of the property and the sale of the property (excl GST)
For example: if you purchased a house for $400,000 excl GST and the sale was $500,000 excl GST then you pay 15% GST on the $100,000, which equates to $15,000.
In regards to Mikasa Pl, Mangere the real trading numbers were as follows:
Purchase price $460,000 (Incl GST) $400,000 (excl GST)
Renovation cost $50,878.30 (Incl GST) $44,242 (excl GST)
Holding costs $13,043.70 (Incl GST) $12,244 (excl GST)
Selling costs (staging and LIM) $2,538.05 (Incl GST) $2,207 (excl GST)
Our proposed end value was $550,000, or $478,260.87 excl GST, which means we would have to pay GST on $78,260.87. This would be $10,207.94.
To calculate our projected profit, we do the following calculation:
$478,260.87 (projected sale price excl of GST)
- $400,000 (purchase price excl GST)
- $44,242 (renovation cost excl GST)
- $12,244 (holding costs excl GST)
- $2,207 (selling costs so far excl GST)
$19,567.87 – This is the profit we were looking at receiving without even paying for an agent to sell it for us and this deal was actually a joint venture, so the profit was to be split 50/50.
As you can see, we were starting to get a little nervous at all these ‘extra’ costs we had never heard of before. How were we going to turn this into a deal that made us a profit and not a loss? We had a few options, firstly we knew that we needed to sell it privately and try for a sale price greater than what we initially thought. So, this is what we set out to do.
We were very lucky that the market was starting to increase slightly and buyers were looking at private sales. We managed to secure a buyer in only three weeks and at the beginning of June 2015 the property sold for $565,000. Meaning that we only held that property for three months.
The final numbers on the property were:
Purchase price $460,000 (Incl GST) $400,000 (excl GST)
Renovation cost $50,878.30 (Incl GST) $44,242 (excl GST)
Holding costs $13,043.70 (Incl GST) $12,244 (excl GST)
Selling costs $3,144.05 (Incl GST) $2,734 (excl GST)
Sale price $565,000 (Incl GST) $491,304 (excl GST)
This gave us a final profit of $32,084 which we were very happy with.
You have worked hard to have the money to invest in property. Too hard to lose it by not fully understanding the numbers. Everybody has different numbers based on the type of lending and renovation experience they have, so it pays to understand what your costs will be when you enter into a trading deal.
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