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This is the fourth in a series of articles based on goal setting. One of the most important areas we cover in the University endorsed Property Investment course is that of setting your own goals. I break down these goals into six different categories:
• Retire richer
• Retire earlier
• Supplement your income
• Work part-time
• Give up your day job
• All or some of the above!
This week I consider the goal of working part time. This goal is just a variation of the goal discussed in the previous article which was supplementing your income. Basically, to be able to work part time, you need to secure a supplementary income on a regular basis. Let me explain.
In the previous article, I illustrated how to supplement your income, by outlining some basic calculations on a renovation (click here to read the article). By the end of the project, you should have made a $75,000 profit.
Now let’s assume that your wage is $75,000 per annum. If you wanted this profit to go towards giving you time off work, you have a number of options:
• Take one day a week off for 5 years (use $15,000 per year for 5 years)
• Work half time for 2 years (Use $37,500 over 2 years)
• Take a whole year off! (Use it all in a 12 month period)
Your choices are almost limitless. However, to be able to cut back your hours in your day job on a permanent basis; you need to turn this into regular and secure income. In other words, you need to take out as much risk as possible and repeat this money making process.
To be able to minimise your risk, you should be considering more than one set of figures. You should be conducting a Scenario Analysis. This is a method of working out Best Case, Worst Case and Most Probable Case outcomes.
In the best case scenario, we assume that as many of the variable factors work in our favour. In the worst case scenario, we assume that anything that could go wrong does go wrong. The most probable case scenario is based on everything going to plan.
The figures I outlined in the previous article were based on a most probable case scenario, that is, everything going according to plan. The figures are below.
SCENARIO ANALYSIS Most Probable
Purchase price $400,000
Purchase costs (approx 6% of purchase price) $25,000
Renovating costs $40,000
Holding costs (6.5% interest for 5 months) $15,000
Selling costs (approx 3.5% of selling price) $20,000
Profit $75,000
Final sale price $575,000
But suppose it all didn’t go to plan! In the following scenario, I have assumed:
• You got caught up in the auction hype and paid an extra $20,000 for the property.
• Purchase costs stay the same (these are mainly fixed bank and statutory charges).
• Your renovating costs have doubled. Unforeseen electrical, plumbing and roof repairs.
• A slightly higher interest rate.
• It is a very soft market and selling time increases dramatically.
• Salesperson has negotiated a higher commission and advertising costs increase as your property is on the market for a long period of time.
• In this very soft market you sell for about 10% less than originally planned.
SCENARIO ANALYSIS Worst Case
Purchase price $420,000
Purchase costs (approx 6% of purchase price) $25,000
Renovating costs (extra $40,000) $80,000
Holding costs (7.5% interest for 12 months) $40,000
Selling costs (approx 4.5% of selling price) $23,000
Loss ($68,000)
Final sale price $520,000
Now let’s suppose that it all goes exceptionally well. In the scenario below, I have assumed:
• You’re an excellent negotiator and you bought the property at a $20,000 discount.
• Purchase costs stay the same (these are mainly fixed bank and statutory charges).
• You saved $10,000 on the renovation as you have sourced second hand materials.
• Found a lender with a lower interest rate.
• Your salesperson is a genius and sells it very quickly.
• Your negotiating skills come into play again and your sales person agrees to a lower commission.
• The market is on the way up and someone falls in love with the property. This results in the property selling for approximately 10% more.
SCENARIO ANALYSIS Best Case
Purchase price $380,000
Purchase costs (approx 6% of purchase price) $25,000
Renovating costs $30,000
Holding costs (6.0% interest for 3 months) $7,000
Selling costs (approx 2.5% of selling price) $16,000
Profit $177,000
Final sale price $635,000
Now that we have completed the figures for three different scenarios, the picture is much clearer. We originally made the simple assumption that there was $75,000 profit in this renovation project. However, by considering a couple of different scenarios, you could end up losing $68,000 or making up to $177,000. That’s a difference of almost $250,000!
Conclusion:
If your goal is to work part time, one way to achieve this is by making extra money on a regular basis. You can do this if you are diligent and conduct a scenario analysis so as to consider a variety of situations. You must consider the risks as it only takes one poorly thought out project to empty out your bank balance and set your goals back many years.
In the next and final article of this series, I will outline how you can give up your day job through property development.
Happy House Hunting!
• Written by Peter Koulizos, university lecturer, author and buyers advocate. Peter will be presenting at “The Essentials of Property Investment” seminar in Melbourne on 19th June. Click here for details.
