Getting serious on speculation

Question from Viv updated on 20th February 2013:

We have a few rentals already and we also have a business. We want to increase our income to use for a deposit on another rental property or pay down debt on current rental properties. Our plan is to have about $2 million in equity in property to retire in about ten years. To do this we would sell the family home as we would use the equity to purchase another house to live in while we renovate. When the renovation is done we would put the house on the market and use the profits to pay down debt and also use some money for deposits on another property for our portfolio. We would plan on doing about two per year. Do you think this strategy would work in the current environment? We have done renovations in the past on properties we have kept but I guess we are just wondering if there is enough money in this strategy if you are selling? We have never used Trade Me for selling houses but I guess that would be one way of keeping costs down. What do you think of this strategy?

Our expert Kris Pedersen responded:

There is a lot of money that can be made with property speculation but it also carries a lot of risks like if the market changes you can be caught with a property that doesn't necessarily meet your rules in regards to holding. I often see traders get their numbers slightly wrong which eventuates in them doing a lot of work for nothing or potentially incurring a loss. Having said that depending on where you are in New Zealand, the market does have more heat in it than it has for several years so there is some potential there. You do need to get some good tax advice in regards to going down this track and understand that you are likely to be giving the IRD 43% out of every dollar in profit you earn (28% company tax + 15% GST). With the fact that risk is attached to this type of activity you should seek advice on what the best way is to structure yourself as well. I do see quite a few people who get into property trading who are already earning a large amount out of their businesses. Remember that this activity is effectively like a job as you are swapping hours for money and compare that with the return you get from the effort you get from your current business activities.

Kris Pedersen of Kris Pedersen Mortgages is a commentator on property and finance. His team sources top finance strategies.

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