Does the deal stack up?

Does the deal stack up?

Once you become an expert in a few suburbs, you have a general idea of how much different types of properties sell for, and which parts of a suburb are more desirable than others, right down to the street level.

So once you find what you think is a good deal, how do you check the math’s to see if it stack’s up? Lets say you found a block of land and want to build a house (but you can use this approach for most deals, renovations etc) then there are a few figures you need to work on, these are:

1. The sell price of the finished product – find out how much new properties are selling for in the area, or if you are doing a renovation, find out how much renovated properties are selling for – and be sure to try and compare like for like – if you are intending on building a single story home with 4 bedrooms on a 405m2 block, obviously you will look for sales data for similar properties.
2. The cost of improvements/construction – it is important here to take note of the size of the home, the level of finish, i.e does it have laminex bench tops or stone, is it air-conditioned or are there fans, are the tiles very basic or more expensive porcelain tiles? What you must include in the cost for construction and renovation is the cost of interest on the property while you are building or renovating – you should estimate how long it will take, then add 20% because things will almost always pop up that will extend the time to complete the project.
3. In and out costs – the other costs that you need to allow for are you stamp duty and legal costs when you purchase, plus your sales costs when you are selling, allow for around 3% for sales costs, and in terms of stamp duty, you can use an online calculator (like this one – http://www.stampdutycalculator.com.au/) to estimate your stamp duty. As a rough guide, add $1,200 for conveyancing and searches.
4. The purchase price – so the above two figures help you arrive at a purchase price. For example, you need to see that if you can sell for, say $750k, and the construction/renovation cost, including your interest cost is say $300k, then you need to purchase for below $400k to make any money – so you need to determine how much you expect to earn and subtract that to get to your purchase price…..you should aim at around 20% profit on your total cost.

So this is a rough guide on how to run through the figures, please note that I have not considered anyone’s personal circumstances in these basic numbers so you should first consult your accountant and discuss your own situation to understand your tax and asset protection options.

I hope this has been helpful, making sure the numbers work is by far the most important part of assessing an opportunity, if it doesn’t stack up, quickly move onto the next one. Leave a comment or send through an email if you have any questions.

Cheers, happy investing
Shane.

Category: Property Investment