To Flip or Flop? Advice From a Property Developer Guru

Those property flipping TV shows make it all look so easy! Remove a wall here, slap on some paint there and rake in the profit.

There’s been a huge rise in the number of kiwis wanting to flip houses.

Known in New Zealand as ‘property trading’, this seemingly glamorous industry can be hugely rewarding and exciting, but it also has some pitfalls for the uninitiated.

Chris Brennan from the Powers Realty team has completed 19 trades and has experienced the highs and lows of property trading.

He shares some tips below. 

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I’ve long had an interest in property.

It peaked when I bought my first house in Mangere, South Auckland and watched it go up $100k in value over about 18 months – more than I was making a year at that point.

I thought to myself, “If I had 10 of these, I would have just made $1 million dollars!”

From then on, I was hooked.

I devoured every book I could find on property investing, saved furiously for my next house, and renovated the house

I was in to add additional value.

I was working my butt off, but I felt like it was still taking too long.

I had enough for a deposit on just one more house and if I bought a rental I would be limited to this cycle.

I was impatient and hungry, and so my foray into property trading began. 

My first renovation was a three-bedroom 1960’s house on a corner site.

At this point I had left my job to focus full time on property.

I decided I would live in the garage of the house for the duration of the renovation.

That way I could be on site to keep an eye on things and could give my builder a hand to speed things up and bring the cost down.

I had planned to complete the renovation in four weeks.

It blew out to eight weeks as I struggled to get tradies.

Being on site every day meant I saw every flaw in the house.

I’m a real perfectionist (a trait I’m working to overcome) and became obsessed with getting everything perfect.

When the renovation was finally finished, I was exhausted from making a barrage of small, unimportant decisions all day.

Worse still, I had been so caught up in the project I hadn’t spent any time looking for the next house to move on to.

I was jobless and if I didn’t sell this property and find another one soon, I would be sleeping on the street!

The property was on the market and I needed it sold ASAP.

The agent told me he could get $30k above my predicted end value. Awesome!

I became fixated on that number and as the weeks dragged on, I began to wonder if we would ever achieve a sale.

In the end the sale took ten weeks.

The house sold for $10k above my number and I had paid an additional $8k in holding cost.

On top of that, I had lost precious time in which I could have been renovating the next trade.

I vowed to not let greed cloud my judgement again.

My mentor taught me “always leave something in it for the next person”.

To this day I believe in this and will now always take the quick sale over chasing top dollar. 

I’ve come a long way since that first renovation.

Here’s some of the most important things I have learnt on my journey so far: 

1. Get structured

Setting up the correct structures before buying your first trade property is hugely important.

The first thing most people ask me when they find out I am a property trader is “How do you get around capital gains tax?” Simple, I don’t.

Property trading is a taxable activity and you should have the correct structure set up.

Not only is this to keep you safe, but also ensures you are getting maximum tax efficiency.

Speak to your accountant about what structure is best for your current situation (be sure to ask your accountant to explain GST zero rating and tainting).

Property operates just like any other business; claim GST on purchases, pay GST on sales, claim expenses, pay tax on profit.

If you’re a little short on your renovation budget the GST return from your house purchase can be a welcome financial boost.

If I’m paying tax at the end of the year it means I’m making a profit. This is a good thing! 

2. Build your A Team

Having a good team of experts around you is a must when trading property.

It’s a huge help if your team all work together cohesively.

Your transactions will be a lot smoother if your accountant speaks to your mortgage broker, who speaks to your solicitor, who speaks to your real estate agent, who speaks to your mortgage broker, and so on.

Your team should include, but not be limited to: 

• Accountant
• Mortgage broker
• Solicitor
• Real estate agent
• Builder
• Painter
• Plumber
• Electrician
• Property Stager

3. Don’t be greedy

The first offer is often the best offer and in property trading this is even more true. Holding on for top dollar can cost you thousands in holding costs and delay your next trade. Be realistic on price and always leave something in it for the next person.

4. Know your numbers

Learn your market, know your numbers and buy well.

The renovation is not the most important part of a property trade.

Yes, it’s important, but a reno is a reno.

The buying process is where you make or lose your money.

For this reason, you should expect to spend a considerable amount of time purchasing the right property at the right price.

Dolf De Roos, a legendary kiwi property investor, has a 100:10:1 rule: For every 100 properties you view, you will put offers on 10, and end up buying one.

I have found this rule to be surprisingly accurate and a good guide for the amount of time you should expect to spend buying.

Look at both do ups, and already renovated houses.

It’s important to learn the value of what a renovated house will sell for in your area.

Take notes and follow up with the agent to find out what the property sold for.

In trading property “End Value” is everything.

A good agent can help you with end value, they can supply recent comparable sales in the area and should be able to give you an idea of potential value once renovated. 

5. Look for hidden gold

Does the house have any unrealised potential?

Can you change the layout to add an extra bedroom?

Can you open up the living space?

Add a scullery?

Create an outdoor living space?

If you are able to find a value add that other buyers haven’t considered, you may be able to pay more for the property and trump the competition. 

6. Always be prepared to walk away

No deal is worth losing your shirt over and there’s always another deal waiting right around the corner.

If you have hit a wall in negotiations it’s ok to walk away, don’t be tempted to go over your budget.

The minute you lose the ability to walk away you have lost the game.

Remember, everything is a negotiation, the most dangerous negotiation is the one you don’t know you’re in. 

7. Know the time

Be realistic about timeframes for your trade.

People often underestimate the amount of time between purchasing the property and getting the funds back into your account on settlement date.

Best case scenario is around three months.

This allows for three weeks to renovate, one week for staging and marketing, one week to sell, three weeks under contract, four weeks to settle.

If your reno goes a little over schedule and your property takes a little longer to sell, then you can be out to four months in the blink of an eye.

Keep in mind that tradies will be very hard to book in December and the property market goes practically dead from mid December until mid January. 

8. Look before you leap

Don’t be too hasty to ditch your job and become a fulltime property trader.

The banks have really tightened their lending serviceability criteria and you could find that you snooker yourself and can no longer get a mortgage.

The banks want to see at least two full financial years of trading income before lending, even then it can be a struggle if trading is your only source of income.

If you or your partner have a salaried income this is ideal as it will keep the bank happy.

Be sure to speak to your mortgage broker about the repercussions before considering a career change. 

9. Most importantly – Take action

Make a plan and start working towards it today.

Get out and visit some open homes and start speaking to agents.

Meet up with other property traders and learn what you can from them.

Remember, a goal without action is just a dream. 

Today my renovations take three weeks and run like a well-oiled machine.

My tradies know the quality of work I expect from them.

I use the same paint colours, finishes, kitchen, tiles etc. so the decision making is minimised.

I spend minimal time managing the renovation and more time finding the next deal.

Property has all the ups and downs of a rollercoaster and I wouldn’t have it any other way.

While my property trading has now taken a back seat to my real estate career, my love of the industry has never been stronger.

Property has changed my life for the better and can change yours too!

Time to talk to the Powers Team?

Talk to your closest Powers Team member for help to choosing a property, call 0800 72 63 72, or email info@powersrealty.co.nz.