Doing up houses to cash in
Arecent report of analysis by the website homes.co.nz, showed the value that could be added to a home by way of refurbishment. The analysis showed a big difference between the value of a house before and after refurbishment. The best suburb showed nearly $250,000 increased value following renovation.
This must be good news for the do-up merchants. These are people who purchase run down houses, do them up and then sell them on at a profit. Over the years I have met many such people and generally, my experience is that doing up houses for resale is a profitable business.
But before you re-mortgage your house to buy your first do-up, there are a few things to think on. First, in most localities around the country this is a very competitive game. There are lots of people doing it, and to win you need to have a good eye to spot a prospect that can be significantly improved with a minimum of time and money. Competition means you have to be very quick in your analysis to get in before the others.
Essentially, you need to be able to spot the gap which will give you a good profit margin. That means knowing what the market is looking for and what it values, because your own personal tastes do not count.
Second, there are risks. Cost over-runs or market downturns can hit profits and, of course, each purchase is a game with high stakes. A strong property market as we have now is helpful and will cover up most mistakes, but the market can turn quickly. Theoretically, you can profit in any market, but a hot market will usually mean a quicker more lucrative turn around.
Third, time is crucial. You are likely to have an empty house with no income and so there is a race to complete work. Time can bleed profits - you need a line-up of good trades who will give your work preference so that there are no delays.
Fourth, each do-up is likely to come with a bit of stress and also require a good bit of hard work. Understand that this is no lazy way to riches.
Fifth, pay your tax. To buy with the purpose and intent of resale means that profits are taxable. Two or three successful deals followed by a large unexpected tax bill can leave you more than a little financially embarrassed: I have seen instances of unforeseen tax assessments leading to bankruptcy in the past.
The business of do-ups needs a good deal of thought and consideration regarding what is your competitive advantage. Go slowly at first. Someone new to the game should do one deal at a time with no new purchase before the previous deal is complete.
Martin Hawes is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com.