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buying reno and sell or buy reno hold!

Discussion in 'Real Estate' started by Triu, 28th Dec, 2006.

  1. Triu

    Triu Well-Known Member

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    Can anyone tell me why one is better than the other?

    If you want to build up your cashflow is it better to buy, reno sell? or buy, reno hold and redraw equity?

    Can you buy, reno sell through a trust? Can you buy, reno, hold and refinance through Trust to get access to the equity and is it tax deductible if you use it?
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Buy-reno-sell

    Advantages:
    - minimal capital tied up, since you are continually turning over property
    - lower interest costs overall, since no long term hold of propery
    - potential for regular income (anually or semi-annually, depending on how many you do) for relatively small outlay (compared to buy-hold)
    - potential tax advantages if you actually run it as a business ... not a trivial thing to do, and only works if you are seriously in a renovation business as opposed to doing one or two
    - servicability less of an issue, since you aren't accumulating debt
    - no tenancy issues to deal with

    Disadvantages:
    - less capital growth
    - no CGT discount if held for less than 12 months
    - no rental income while renovating to offset holding costs
    - no asset base build-up, need to continually work to generate income
    - buy/sell costs eat into returns
    - CGT eats into returns

    Buy-reno-hold

    Advantages:
    - no CGT since you aren't selling
    - can access 90%+ of the increased value via equity draw without selling
    - no sell costs
    - increased rental income once reno finished
    - rental yields can dramatically improve post reno
    - get access to ongoing capital growth

    Disadvantages:
    - difficult to continually buy without a solid income stream behind you due to servicability limits
    - ongoing growth after reno may take time
    - tenancy issues


    ... I'm sure others can add more pros/cons for each option.

    I think it will come down to personal preference to a degree.

    I will note that I know several very wealthy people who made their money by buy-reno with both sell and hold. Several of them actually calculated how much they would have been worth had they held some of their properties long term rather than sell ... and they worked out they would have been better off holding. Michael Croft is one example - he used to buy-reno-sell, but worked out he was far better off over the long term to buy-reno-hold. Of course, if you can't afford to hold, it may be better to sell initially until you get to a point of being able to hold.

    The key to building wealth is leverage - leverage you money and your time. Capital growth is a wonderful thing because it usually happens without you necessarily putting in any ongoing effort ... and can be had for a relatively small outlay of your own money through leverage.

    I prefer to hold property for as long as it continues to make sense to do so.

    My personal approach is to sell assets only when my reason for holding it is no longer valid, or if I've changed my approach, or if I need that money for something that will make even bigger returns than if I held.
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Oh, and you can do all of this through a trust (assuming the trust deed does not preclude you from doing so).

    As for the question about drawing equity and "using it" ... it depends on what you are using that money for. If it is for investment purposes, the interest will be decuctible.

    This applies to almost any situation or structure - it is the purpose of the loan (not the source or vehicle) which determines the deductibility of the interest.
     
  4. ramone_johnny

    ramone_johnny Well-Known Member

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    Some excellent and very valid points already made. Its interesting to hear that quite often the "majority" of investors in the real estate market encourage the hold strategy. I guess it all comes down to what you want. For me its about getting out of the rat race, and to do so initially I believe the onsell approach makes much more sense. I want to make money. I want to make it fast and I dont want to have to do much to get it. Im really not interested in making small percentages over the next 15 years. Bugger that, im sorry but its not for me.

    I find it really interesting though, and I have heard this quite often about wealthy people who started out with the onsell approach initially. There must be *some* truth to this strategy. Sure holding would be great - if it was financially viable.

    Its the shortfall in costs that I dont find attractive. Not at all. If I asked you to deposit $70 a week into my bank account - would you? Or would you prefer I deposited $70 into yours? Seems pretty straight forward to me.

    Im not interested in shortfalls, or negative gearing. I want to build enough of a cash base to take on big projects that allow me to buy property outright. This way I have positive cashflow, or passive if you like.

    Money coming in - not out.

    I mean at the end of the day, just how many properties can you hold when youre losing money on each one?

    Just my thoughts, best of luck with your decisions.

    RJ
     
  5. Giddo

    Giddo Active Member

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    I like your thinking RJ.
    I too am interested in making money and the sooner the better.

    Where do you place the importance of owning a PPOR?

    Is it important to you to own your own?
    If so, I can see how getting cash in fairly quickly is important.

    No good holding a heap of IPs if you have nowhere to live yourself, or are paying big interest on your own home loan.

    To me, this is an important issue.

    If someone is starting out, it must be a huge issue.:)
     
  6. ramone_johnny

    ramone_johnny Well-Known Member

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    Not at all. Infact I dont want my own home. Peter Spann said it like this - "the poor buy their house first, the wealthy buy it last". More personal expenses mean less to invest. I couldnt care less about owning my own place right now. For a number of reasons - the biggest being the financial responsibility. I want to invest my money to make more money - I want to be wealthy - not *look* wealthy.

    Ive said this in the past and Ill say it again - the last thing i want right now is my own mortgage - sure ill take on a mortgage if someone else wants to pay for it. Ill sleep in my car, in a tent, a park bench, in a block of public toilets if thats what it takes - but no way will i tie up my money in outgoings with no returns simply to impress people I dont know.

    I think the best position to be in is to have leverage. Walking into the bank and saying..."I have no debts, no credit cards, no financial commitments, just basic living expenses and a small car, Im on $65,000 a year and pay $100 a week rent - how much can I borrow!" :D

    As I read just recently, sometimes its easier to lower your expenses than it is to increase your income - and this is what I have done over the past 2 years - well actually ive managed to do both, along with passive income from my websites.

    I know others will disagree and have different view points - thats ok, this is only mine. Each person has a different set of circumstances to which they must be mindful of.

    I guess Im just an agressive investor who wants to kick arse!

    RJ
     
  7. FrankGrimes

    FrankGrimes Well-Known Member

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    Great post RJ and couldn't agree more. Works very well in Sydney where renting is cheap and owning costs a fortune.

    A PPOR debt is very inefficient. Even an average place could cost you $2000 pm with no tax deductions, and if you're lucky you might pay it off in 30 years.. While its probably different for people with a family I can't see the point otherwise.

    I lived in a share house worth probably around 700k and paid $140pw.
     
  8. Triu

    Triu Well-Known Member

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    Thanks RJ i very much agree with you also. I mean everyone is telling me that buy and hold is great for long term wealth. yes i agree with it, but if you are in a job that just ties you to pull money out of your pocket each week and wait for capital gains you will be waiting a long time.

    Every successful investor i have spoken to all say the same thing i built up my position by buying, renovating, selling and then buy and hold plus other business. I agree that i have decided to start a parttime marketing business very early stages now with the help of some business coaches who have acutally made it.

    Plus i will also buy, reno sell for a profit and then build up cash, then buy and hold where i can see it growing but not costing me alot each week in negative cashflow.

    It all takes times yes but i do enjoy working on my own and will be working hard to achieve that freedom of making my own financial decisions with cash coming in from multiple streams of income.

    thanks again you set me straight!
     
  9. ramone_johnny

    ramone_johnny Well-Known Member

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    Think of it like this...this is just something that popped into my head. It probably makes no sense but you might get something out of it! :D

    Think of creating wealth as a bucket. You want to fill that bucket with water (money) as best and as quickly as you can. Each form of income you create is like putting a hose in there and turning it on - hence filling the bucket. The more hoses you have the quicker it fills right? Each expense is much the same as putting a hole (depending upon the size of the expense obviously) into the side of the bucket - which inturn causes water to leak out. You lose water (money) The more holes you have the quicker you lose it AND the harder it is to fill!

    The first thing you gotta do to fill that bucket is plug all the holes. (Reduce expenses) Then work towards putting as many hoses as possible into the bucket (create passive income) and watch it fill!

    This is where I think a lot of people make the mistake of firstly spending too much (holes in the bucket) then frantiically trying to fill it by adding more hoses (working more jobs or overtime) which makes no sense because its a tireless struggle!

    Anyway, its late and this is probably just dribble.

    Im off to bed

    RJ
     
  10. JoannaK

    JoannaK Member

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    Hi RJ,

    Looks to me that you've spent quite some time thinking about this, and you have crystalised your thoughts well over the last few months. Congratulations to you.

    I do not subscribe to the hold forever and a day philosophy either, but I do believe that cashflow is king, and in order to have cashflow one would need to hold assets (putting aside your daytime job).

    I think it a prudent strategy to build a cash base, in this case by adopting the reno - sell strategy whilst at the same time, building a casflow base. Perhaps you can hold every second or third reno you do in order to start creating that cashflow base.

    Just a thought....
     
  11. ramone_johnny

    ramone_johnny Well-Known Member

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    Hi Joanna,
    Great to hear from you. Hope you had an enjoyable new years!

    In response to your comments, I agree. Certainly the way out of the rat race is to create income or cashflow. Without cashflow you go nowhere. My strategy at this point is relatively simple - create a financial base to better position myself in an effort to be able to purchase outright over time. Through building, and onselling repeating and moving to larger projects such as developments.

    Looks good in writing huh? :D

    Anyway..

    What you said to me some time ago still rings clearly in my mind today. I cannot thank you enough for your time, coffee and influencial wisdom!

    Thanks

    RJ
     
  12. Nigel Ward

    Nigel Ward Team InvestEd

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    RJ the bucket analogy is a great one. I've used exactly that analogy with one former colleague of mine who is a real spender. Now whenever we catch up the first thing she says is "and don't you mention the @#$%ing bucket!"

    Ah well, I suppose you can lead a horse to [a bucket of] water... :p

    Cheers
    N.

    ps. I guess the best outcome is to build a whole series of big pipelines to replace the bucket-line ;)
     
  13. Here_To_Learn

    Here_To_Learn Well-Known Member

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    I know the rent vs buy has been debated at length and there are pros and cons to both.

    Personally with a family now the feeling of living in YOUR OWN HOME is becoming important to me hence why we are starting our search this year. I realise this is a personal lifestyle choice and renting we would be financially better. No doubt here.

    So ... we are considering selling one of our IP's to put down a large deposit and reduce the non-deductibe debt :( . We will then draw down on the equity and re-invest in an income fund.

    With the right plan it may be possible to have the cake and eat it too. :cool:

    I would be interested in others who have taken this approach.
     
  14. Jacque

    Jacque Team InvestEd

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    With dependents, and especially little ones starting school, there are definite benefits to having the stability and security that having your own home brings. Let's not also forget the fact that your PPOR is also one of the few assets left that is totally tax free upon sale. Without this concession, Australian rental markets would be a lot different :eek: