Risk of seeking fast profit in property

From renovation to subdivision, reconfiguration to development, there are multitudes of methods to add value to a suitable property. People specialise in it; professional developers often make significant profits and property owners often think that it’s a clever way of making big money.

So why do these ideas need a degree of caution? Is the expectation of high reward over a short period of time too much of a gamble in the property market?

Let’s talk frankly about making money quickly in property. It’s not as easy as it sounds. This isn't because fast profits are impossible; but because so many people think they can replicate others’ successes with limited effort, they don’t consider the negative impact if their plan doesn't come to fruition.

Australian capital city properties have certainly been kind to property owners over the last few decades. Even, with occasional economic crisis, overall growth trajectory has been positive and our perceived supply and demand imbalance has made owning property very attractive.

For a passive-investor (one who doesn’t actively improve or manage the property themselves, but outsources to professionals), property gains can be exceptionally attractive for a well-located asset when time is allowed to do its thing.

The difficulty in trying to manufacture equity is four-fold, and one thing for certain is that profits can’t be guaranteed, nor are they achievable for many folks.

Improving a property physically requires a significant monetary outlay. Whether a tradesperson is assigned to the task and paid, or whether the owner is going to do the work themselves, someone’s time needs to be remunerated.

Owners who don’t put a value on their own time are not being realistic about the total project cost. Every hour that an owner spends working on a property is an hour less that they are working in their day job.

And for those who try to fit their property project around their paid job are spending less time with their loved ones; a price that is definitely hard to measure.

To compound this, some owners assume that their renovation will add more value than the cost of the materials and labour, regardless of its location.

There are times when this strategy pays off, but there are also many cases where owners have overcapitalised on a poorly located property (spent more on the renovation than the value that they've created).

Scoping out the cost, the benefit and having contingency for overruns is essential.

Builders and tradespeople are particularly good at manufacturing a profit. They have access to materials at trade prices, they have good tradesperson connections and, most significantly, they can operate on an attractive scale of economy.

For a DIY owner with limited renovation experience, profit can often be a hit and miss outcome.

For those who are fortunate enough to create value through their renovation, holding versus selling needs to be a serious consideration.

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When the decision to sell is made, (this is known as ‘renovate and flip’ strategy), the owner then needs to calculate the impact of these three elements on their gains:

• The stamp duty and interest paid on the mortgage, purchase costs and holding costs they have endured

• The capital gains tax they’ll pay as a result of the sale

• The agent’s selling fees and marketing costs

For some, the gains are whittled away by the above; particularly if the expected sales result is not achieved.

Property owners need to answer these five questions honestly before they commence their fast-profit strategy roll-out;

1.     Do I have the time to to/manage/renovate this?

2.     Have I done enough due diligence if this project success is based on third-party approval?

3.     Can I afford project overruns or market cycle drops, and do I have enough buffer if I hit road blocks along the way?

4.     Am I better off (financially, emotionally and physically) sticking to my day job and letting time do its thing?

5.     Do I have appropriate insurances in place if things go pear shaped?

Always remember, where there is high reward over a short period of time, there is usually high risk as well.

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This article via Smart Property Investment does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.