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The truth about flipping

Claims about the sky-high gains generated by property flippers ignore the costs and taxes that come with trading properties – and that means the profit assumptions are wrong, property experts say.

Thursday, September 19th 2019, 8:55AM 2 Comments

by Miriam Bell

Bring up the topic of property flipping, or speculation, and it’s bound to leave large sections of the public spitting in indignation.

That’s because there’s a widely held belief that anyone who buys and sells a residential property within a short space of time will be earning vast, untaxed profits while trampling over vulnerable people along the way.

But this belief relies on a number of assumptions – which have been showcased in some recent articles - that are blatantly incorrect, Auckland Property Investors Association president Andrew Bruce says.

“One of the big assumptions made is that property traders are not being taxed on any profit being made and that’s wrong.

“Anyone trading properties on a large scale, or as a business, has to pay income tax. Alongside that, these days there’s the bright line tax which has to be paid on investment properties sold within five years of purchase. And there’s also GST.”

Bruce says the people highlighted in the recent articles, which looked at property flipping in Auckland in the six years to 2018, are all people who operate property trading businesses.

“There is no way they wouldn’t be aware of their tax obligations, or that they wouldn’t be abiding by them and paying ample tax on what they have earned.”

Another common assumption is that the estimated capital gain of a property when resold is all profit for the person doing the trade, Bruce says.

“But, again, that is simply not true. The vast majority of property traders carry out work or renovations, which may not need consents but which improves the house and adds value, before selling.

“So there are renovation costs, holding costs to cover the mortgage, legal costs and selling costs. Even if you sell well, the profits are nothing like the popular estimates.”

This type of trading improves the housing stock and, given the pressing need to improve the country’s housing stock, is a good thing, Bruce adds.

“There’ll always be some aggrieved former owners but you can’t really complain if you chose to sell your house and it then sells for more, especially if it’s in a hot market.

“There might be the odd example of unscrupulous behaviour, but it’s the exception rather than the rule.”

Veteran landlord Peter Lewis agrees. He points out that property trading is a legitimate business enterprise and an acceptable activity in a free market.

“Having a capital gains tax wouldn’t make any difference. Because those people who are in the trading business, they pay tax on what they buy and sell already.

“Anyone who says otherwise should know better. But usually the trading profits presented in the media are before any tax, costs, and so on has been paid, so they misrepresent the reality.”

On top of this, traders are taking a risk and putting in lots of work, Lewis says. He doesn’t go in for property trading because he doesn’t believe the time, effort and risk is worth it.

“Most of the time people actually don’t make the huge amounts from every sale that is implied. I know plenty of people who have gone broke doing it. It’s a bit of a gamble in fact.”

Lewis is far from alone as many investors are not keen on flipping properties and prefer to stick to other strategies, with “buy and hold” being the most popular.

Property investment mentor Lucia Xiao is one such investor. She says investors are accumulators while property flippers are traders and she encourages people to be investors.

“In my view, flipping is not the way to go. There are agent fees (2-4%), GST (15%), holding costs, the renovation costs – and then there’s further taxes. After all that, the net profit simply isn't worth it considering the time, effort, energy and risk required.”

Xiao says property investment which allows people to increase their income and translate that income into assets is a much better option than flipping.

Property flipping may have been more common during the heady days of Auckland’s recent boom market, but even then it was well down on its prevalence in past property booms.

Back in 2017, CoreLogic data showed that 7% of Auckland sales in 2016 were properties that were sold within a year. That is as compared to 11.7% at the peak of the boom in the mid-2000s and 9.2% in the mid-1990s.

Read more:

Investors hold properties for longer 

Bright line test dents flipping 

Flipping not what it used to be 

Tags: APIA Auckland CGT house prices housing market investment price growth property investment supply

« Sales fall highlights sluggish marketPrice fixing earns Ronovationz $400k penalty »

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Comments from our readers

On 19 September 2019 at 4:01 pm Gutz said:
I am a builder who has been trading and holding property for over 10 years full time. After reading the article from the uneducated journalist (who actually interviewed a colleague of mine) in the herald the other day I was amazed at the ignorance, bias, and inaccuracies that were published in that article and am thankful that some one has attempted to point out some of the true challenges and risks that property traders/investors take on. The frustration for me is that having it published in this forum is like preaching to the converted, perhaps it should be published in the herald next to her column
On 22 September 2019 at 8:10 am Winka said:
aha....and the flippers and the holders "both" will end up in the same boat when the inevitable BIG financial crisis hits quite soon.

All the DEBT created by the mostly un-needed regulation resulting in new scaffold and white-plastic-wrapped buildings is debt that will come home to roost also.

Most of that scaffold & plastic was to give the perception of a "booming" economy, and much of the unnecessary regulation was an overkill from government department people who did not want the finger pointed at them eg; when there was a fire and someone couldn't find the door a few metres away from where is had always been for ages, so regulation said to fit a few of those permanently-lit "exit" signs to the ceiling?

It's all good to make a profit,,,and most certainly, the company who makes those exit signs (and probably fits them) and who piddles in the pocket of the government person who set that regulation made such profit, but at the expense of who.
Not only the customer, but the company themselves will eventually ultimately pay.

When the inevitable "crunch hits and the 'booming' ecconomy becomes a 'bombing' economy, many ask when will it happen?

It only needs a 'trigger' a bit like Iran blocking their large crude-oil contribution to the world, and the huge resulting oil-price hikes will cripple industry worldwide,,,,,that's all it will take as a catalyst?

Then flippers, builders and virtually everyone are going to be caught up in something predicted to not be a recession, it;ll be more serious than that, and.....only time will tell as the saying goes.

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AIA - Back My Build 6.19 - - -
AIA - Go Home Loans 8.74 7.14 6.75 6.39
ANZ 8.64 7.74 7.39 7.25
ANZ Blueprint to Build 7.39 - - -
ANZ Good Energy - - - 1.00
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ASB Bank 8.64 7.14 6.75 6.39
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BNZ - Green Home Loan top-ups - - - 1.00
BNZ - Mortgage One 8.69 - - -
BNZ - Rapid Repay 8.69 - - -
BNZ - Std, FlyBuys 8.69 7.74 7.39 7.25
BNZ - TotalMoney 8.69 - - -
CFML Loans 9.45 - - -
China Construction Bank - 7.09 6.75 6.49
China Construction Bank Special - - - -
Co-operative Bank - First Home Special - 6.79 - -
Co-operative Bank - Owner Occ 8.40 6.99 6.79 6.65
Lender Flt 1yr 2yr 3yr
Co-operative Bank - Standard 8.40 7.49 7.29 7.15
Credit Union Auckland 7.70 - - -
First Credit Union Special - 7.45 7.35 -
First Credit Union Standard 8.50 7.99 7.85 -
Heartland Bank - Online 7.99 6.89 6.55 6.35
Heartland Bank - Reverse Mortgage - - - -
Heretaunga Building Society 8.90 7.60 7.40 -
HSBC Premier 8.59 - - -
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 7.85 7.05 6.69 6.59
Lender Flt 1yr 2yr 3yr
Kainga Ora 8.64 7.79 7.39 7.25
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 8.50 7.99 7.79 7.55
Kiwibank - Offset 8.50 - - -
Kiwibank Special - 6.99 6.79 6.65
Liberty 8.59 8.69 8.79 8.94
Nelson Building Society 9.00 ▼7.65 ▼7.25 -
Pepper Money Advantage 10.49 - - -
Pepper Money Easy 8.69 - - -
Pepper Money Essential 8.29 - - -
Resimac - LVR < 80% 8.84 8.09 7.59 7.29
Lender Flt 1yr 2yr 3yr
Resimac - LVR < 90% 9.84 9.09 8.59 8.29
Resimac - Specialist Clear (Alt Doc) - - 8.99 -
Resimac - Specialist Clear (Full Doc) - - 9.49 -
SBS Bank 8.74 7.74 7.29 6.59
SBS Bank Special - 7.14 6.69 5.99
SBS Construction lending for FHB - - - -
SBS FirstHome Combo 6.19 6.14 - -
SBS FirstHome Combo - - - -
SBS Unwind reverse equity 9.95 - - -
Select Home Loans 9.24 - - -
TSB Bank 9.44 7.79 7.55 7.45
Lender Flt 1yr 2yr 3yr
TSB Special 8.64 6.99 6.75 6.65
Unity 8.64 6.99 6.79 -
Unity First Home Buyer special - 6.55 6.45 -
Wairarapa Building Society 8.60 6.95 6.85 -
Westpac 8.64 ▼7.84 7.35 ▼6.99
Westpac Choices Everyday 8.74 - - -
Westpac Offset 8.64 - - -
Westpac Special - ▼7.24 6.75 ▼6.39
Median 8.64 7.19 7.27 6.65

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