- Purchase Price – $800k
- Sale Price – $1025k
- Reno Cost – $97k
- Holding cost – $13k
- Agent Fee – $35k
- Gross Profit – $80k
- Purchase date – Nov 2016
- Sale Date – Jan 2017
After the investor loan to value 40% deposit rule came into play in October 2016, I could see that things would be more difficult for me to purchase a new rental property. By this time I had 3 rental properties under my belt and was keen to acquire another in Lower Hutt similar to the one I had bought earlier that year. It cashflowed well.
Add to that I was aware that banks would look less favorably on our ability to service debt. 2 of the 3 rentals I had bought were cashflow negative. I knew I needed to buy cashflow positive investments which could not only pay for themselves but cover the shortfall with the 2 Auckland properties which needed topping up. But how to acquire another cashflow positive investment with the new equity restrictions and debt serviceability challenges?
Property trading! or buying to renovate/tidy up/add value and sell on. I had traded one property in late 2015 and I knew it would allow me to make lump sums of cash I could then use to purchase new rentals, pay down debt or improve and create better rents for existing properties.
After completing the first property trade back in 2015, I had realised there was a significant portion of the profits which I would have to pay to the selling agent and the tax department. At the time I had plenty of equity and no problems servicing debt so it made sense for me to keep the houses to start my rental portfolio. But that was before LVR challenges and debt servicing walls. Now I could see that even the net profit in property trading could help me earn the cash I needed to keep growing my little portfolio.
I reconnected with my favourite agents to start the search. I like to go through my buying rules before viewing anything, it helps me to rule out anything unsuitable without having to waste time viewing a place that’s not right and helps guide the agents to know best what to look out for. Buying rules for a property to trade and a rental are different. I revised the rules and sent them out to my buyers agents. They were:
- Buy and renovate under 900k
- 2-4 bedrooms
- I like character and an elevated outlook
- No unit title or bodycorp
- crosslease ok but must be street front
- ability to add bedroom into existing footprint is good
- No pools, plaster cladding, long driveways servicing many houses, dodgy floorplans or serious non compliant alterations.
I was looking for something with my end buyer in mind – first or second home owner occupiers and needed to view houses through the end buyers eyes.
I’d looked at maybe 20 or 30 houses which could have been suitable and made a handful of unsuccessful offers and auction bids before finding 8 Hauraki Cres. I had viewed another property around the corner and was walking back to my car. A man walking a dog approached and asked if I was looking for something in the area, he had a house to sell in the next street, just listed. I told him I was looking for a do-up, that it might not suit. Yes, yes he assured me. It was a renovator. Ok, I’ll have a drive past I said.
It turned out that the man had made an offer on another property he wanted to buy with his brother and needed to sell quite urgently. I viewed the property a day or 2 later which was to go to auction and put in a pre-auction offer of $810k. It was refused and I resubmitted at $830. this was also rejected. The feedback was that the man would like to accept the offer, but he needed to get approval from his mortgage broker that he would be able to fund the balance on the new property. He was due to go unconditional on that new property at the end of the week. He indicated that if he could get the brokers approval, he would accept my offer if it was resubmitted before his unconditional date. I did resubmit the offer. It was also refused.
The vendor had been to another auction that week and seen a similar property to his sell for $870k. He felt he could achieve this for his own property if he held out until the auction. Meanwhile he went unconditional on the new house. I was shocked to hear he had gone unconditional without a sale, it was a very risky position to put himself in, with no assurance of a sale at auction. I also knew this would put me in a very strong position to get the property at a great price come auction day, particularly if there were no other bidders.
Over the next 2 weeks I was away on holiday with family and didn’t have a chance to view many properties during this time. I did make 2 more unsuccessful offers though and so come auction day, I was still looking to buy. The market sentiment had got quite low and many properties were passing in with no bids. The LVR rules were starting to bite and I had growing concerns about my profit margins. I had already decided $830 was more than I was willing to pay for this house.
Prior to auction I applied to the vendor for a variation to the contract, choosing my preferred settlement date and asking for early access for my tradies to quote renovation works. Both were accepted. When Auction time came, there were no other bidders. Bidding started at $750k and the auctioneer worked with me to get my offer up to $780k. The property passed in. Immediately after auction I put my $780k in writing to the vendor. after some back and forth he reluctantly agreed to sell to me for $800k.
The vendor was very upset with the result and blamed the real estate agents for this. He felt they should have been able to get me to increase my offer. But he had put himself in a difficult and risky position by agreeing unconditionally to purchase elsewhere. He was now desperate to sell and I was the only buyer. Over the weeks that followed leading up to settlement he refused access, banned the agents from the property and swore and cursed at them whenever they needed to communicate with him. It was a difficult time and I needed my solicitor to negotiate access for my tradies to get in to quote the renovation.
We were closely supervised during these access visits by the owner and he didn’t seem too happy about my plans for the property either. I think it upset him that I was intending to profit from the property, still feeling hard done by after the auction result. It was very awkward doing a tradie walk through to quote work with the vendor hot on our heels. I’d really try to avoid this in future. Its advantageous to be able to quote a project before you take possession so you can get started with works as soon as possible after settlement day, but this was most definitely an uncomfortable situation. The vendor tried to engage with me on all sorts of details relating to the contract, the settlement/move out date, vacant possession, more money for early settlement, chattels he wanted to take with him. I didn’t want to negotiate directly but was worried if I didn’t engage or agree he would kick me out and we would not be able to get our quotes together. In the end my wonderful painter bailed him up in the back bedroom and got him talking about his race car so we could get done and get out. When we were leaving I told him we’d work through the lawyers to get any other agreement or details in writing. Once back in the office I immediately emailed my solicitor to spell out my expectation so he could confirm this with the vendor. Awkward!
Settlement was scheduled for a Friday and after some to-ing and fro-ing with settlement inspections ensuring the place was vacant, it was mine. My team started work the following Monday.
I had already put together a full scope of work and fully quoted the job so had a good idea of the plan and timeline for the renovation. Most aspects of design and colour choices were also made when putting together the scope of works. People often say to me it must be so fun designing the new house, well partly yes, but a lot of it is a formula where you have figured out what works in a previous renovation and so just repeat this. There are some exceptions of course, in this house there were some aspects of 1960’s character I wanted to retain. The polished floors and steel geometric balustrades became feature aspects of the house and I took inspiration from these for the wall colour (Dulux St Claire) with contrasting white trims and doors (a nod to the 60’s) and the geometric pendant light in the dining room. I wanted to retain some of the 60’s character. The stager visited early on and she also drew from these features to build a look for the house.
After settlement and scope of works I did add in some additional work to the downstairs rumpus room. The previous owner had removed the windows and opened the room up to the outdoor carport to increase his workshop size. On the advice of my husband, who felt it would add value and show further potential to close this in again and re-create a usable multipurpose rumpus room. Thanks Nigel! you were right.
Typically the first week is demolition week. The builder is ripping out kitchens, bathrooms. fireboxes and anything else we were removing or repairing. The painter was prepping for interior and exterior painting. I busied myself clearing out the garden, cavities under the stairs, under the house, garage and workshop areas. The vendor had been somewhat of a hoarder and there were two 9 meter skips of rubbish removed from the site.
Then the build up starts, prewire, preplumb, painting, repairs, kitchen bathroom, laundry installation until slowly, slowly it all comes together. This project took 6 weeks. A little longer than usual for a cosmetic renovation because we lost 2 weeks over Christmas – New Year. My builder let me down on this job and was pretty unreliable. He had committed to another project around the same time and while I did discuss it with him and tried to ensure he had a plan to manage the workload before we began, he was noticeably absent at times and did delay the completion. I had hoped to be complete and on the market prior to Christmas but we weren’t quite ready.
I typically visited the site daily. My main jobs were fetching and carrying, cleaning up at the end of a work day so trades can hit the ground running in a clean tidy workspace the following day. running errands to chose and pick up appliances, fittings, hardware. I also did the garden plan and planting on this house, which helps me keep costs down and gives me a reason to be onsite checking on things each day. I do and did use a project manager in this job who subbed most of the contractors. I probably spend way more time than I need to on site and engaged with the tradies given there is a very capable project manager. Probably just me being a bit of a control freak. I have thought more about the scaleability of property trading. How little time could I actually get away with spending and still have things run smoothly and on time. Probably quite a lot less time I suspect. If I had two or three projects running, could I significantly reduce my time commitment. I think so yes, But at the moment, I like to be there and be involved.
The property went on the market on January 17th. I received an offer seven days later and after some negotiation we agreed on a price; $1025k. The offer became unconditional within 3 days and settlement was quick, scheduled for February 10th. This helps minimise my costs. I had thought I’d need to pay and other month of mortgage payments waiting to settle, but wont need to, this saves me about $4.5K.
I’m working toward raising funds to build a minor dwelling at one of my existing rentals (East Coast Rd ). Completing 2 or 3 more like this should provide the funds for the new build. I’m on the hunt now for a new project to trade to keep moving forward.