why property trading is not a great idea.

why property trading is not a great idea.

(Property trading is buying and selling in a 1-3 year period)

To the casual observer, Mr and Mrs Bumptious at a dinner party sound super clever regaling stories of how they purchased an apartment for $X and sold it for $Y pocketing a huge profit. Picking market trends and enjoying capital growth is certainly something to be proud of. Maybe they enjoyed a very nice world holiday on the spoils, but if we think about it from a longer-term property investment perspective, selling that apartment and buying another one may not have been the very best option.

There are significant costs when buying and selling real estate that reduce the profit. You may hear people say things like “property is a long-term investment” or “buy good property and never sell it”. There is good reason for these adages and generally, property should be held for a minimum of 5 years or better still 10 years.

Here are the main buying and selling costs:

Buying Costs (approx.)

Stamp Duty 5% approx.*
Legal fees / Conveyancing $1,500
Mortgage / loan costs $4,000
Building inspection (optional) $   400
Buyers advocate (optional) $1,000

* Stamp duty is a sliding scale and varies from state to state in Australia.

Selling Costs (approx)

Marketing Costs 0.8% of the property value
Agents Commission 2.5% of property value
Legal fees $2,500
Capital gains tax % of gain at personal tax rate.

There are other costs that may be incurred depending on what entity the apartment was held in and the cost of setting these up such as professional fees in dealing with it. Especially the costs associated with setting up property in a SMSF and borrowing in that structure.

So back to the dinner party and Mr and Mrs Bumptious who are desperately trying to avoid calling themselves property moguls, continue to wallow in their property wheeling and dealing success. In between sips of Pinot, mouthfuls of pulled pork, and nodding at each other approvingly, they explain how they “absolutely stole” an apartment for $500,000 and sold it for $700,000 and then reinvested $500,000 back into another apartment using all their expertise and relationship with a friendly (and now much richer) agent to do it all again. All the time peppering the conversation with stories of their trip to Cuba which they funded from the profits.

The next morning, with the sweet scent of smug content from Mr and Mrs Bumptious still wafting in the air, it was time to analyse these transactions a little closer.

Deal 1 – Bought an apartment – $500,000

Stamp Duty (approx.) $25,000
Legal fees / Conveyancing $  1,500
Mortgage / loan costs $  2,000
Total $28,500

 Deal 2 – Sold that apartment – $700,000

Marketing Costs $  7,000
Agents Commission $17,500
Legal fees / Conveyancing $  2,500
Total $27,000

Deal 3 – Bought the second apartment – $500,000

Stamp Duty (approx.) $25,000
Legal fees / Conveyancing $  1,500
Mortgage / loan costs $  2,000
Total $28,500

The cost of selling (Deal 2 – $27,000) plus buying (Deal 3 – $28,500) is $55,500 or 11% of the $500,000 apartment which is about 2-3 years of capital growth. In affect by selling and buying again they have set themselves back 2-3 years of property investment growth.

If they had kept the first apartment they would have saved $55,500 and could have refinanced it to free up some capital and taken the holiday to Cuba on that. Better still they could have refinanced to purchase a second apartment without selling the first one and built their asset base.

There are however always reasons to buy or sell which are unavoidable. Sometime life gets in the way and things change quickly. Especially if cupid is involved. It’s just not a great investment strategy.

A justifiable reason for buying and selling property is to upgrade your own home, but try to leave a minimum of 5 years between each move. When interest rates are low it is better to own your home, and pay a mortgage than rent. Another reason maybe if you have added significant value some other way like obtaining a development permit or combining it with another property.

Start off buying a small apartment and over time buy bigger and better homes using the equity accumulated in one place to fund the next. The costs of trading are still significant so the less steps the better but you save capital gains tax providing each property is held for more than 12 months (and is your principal place of residence). You will also hedge against property values increasing faster than your own savings.

Tell me what you think below…

I am not qualified to provide financial or accounting advice so please seek your own advice.

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