Times change. The property cycle moves relentlessly on. Seminars are run explaining how to “get rich quick”. Good old common sense seems to be more and more important, and increasingly rare.

The recent property boom bred a high tolerance for debt and risk. Many people leveraged themselves as much as possible… debt and risk seemed to be a winning strategy. At least until the double whammy of high interest rates and a stall in anticipated capital gains. It doesn’t seem so smart paying interest at 9% or more on 100% loans when the gross yield from rental property is 5% or lower, and there is no capital gain in sight.

There have been many seminars advocating property trading as a way to make money. But property trading is not for novices, nor the faint hearted…

Firstly, property trading is time consuming. Finding the property, negotiating the purchase, setting up the structure, organising the “do up” all takes significant time. If you do it yourself in your “own time” (weekends and after work) it can take months to complete, and is likely to negatively impact your personal life.

Since most traders borrow funds to trade and the property is not rented, a quick turnaround is vital. Borrowing say $400,000 at 10.5% means that for every extra week that goes by around $800 goes to the bank as interest. A delay of two months costs $7,000, and that comes straight off your bottom line.

To speed the process up many traders make it their full time occupation. They give up well paid jobs to become self employed property traders. They choose to forego the security of a known and stable income stream for an unknown potential capital profit. While the property may be completed faster and back on the market sooner, there is still no guarantee that it will sell as soon as it hits the market, especially in a slump. And for every week it is on the market another $800 goes in interest, eating into expected trading profits. And there is no longer a regular pay cheque to help fund the interest costs.

Let’s say you give up a full time job paying say $60,000 to do property trading. And let’s assume you can make a net income of say $15,000 per trade (after GST, selling costs, holding costs, and business costs such as annual accounting fees etc). Then you need to do 4 successful trades each year to make up your previous salary.

But we believe that you need to make at least 20% as much again to compensate for the risk factor. So you need to make $72,000 to cover your previous salary and an extra 20% return for your risk. That’s about 5 successful trades a year, or one every 2.5 months. Consistently. With no major mistakes that cost money. Or trades that don’t sell as expected. That’s actually quite hard work. It can be done but it needs plenty of organisation, time, talent, determination, and guts. Is the expected surplus over and above your previous salary adequate reward?

The tax consequences of trading are also often misunderstood. As a general rule once GST and income tax are paid a trader will get to keep around 60% of the gain a long term investor would have made buying and selling for the same price.

What is especially hurtful is when the property won’t sell for the expected price and the trader decides that rather than hold out indefinitely they will sell the property to their LAQC to rent out as a long term investment. That decision triggers payment of GST and income tax to the IRD in the same way as if the property was sold to an independent third party. But the tax payments aren’t being funded by an arm’s length sale transaction, but by the trader.

All traders need to fully understand the tax implications (including “tainting”) and ensure all expected costs are included in their planning. We believe that traders should make an allowance of say 10% over run in costs and time to complete and sell. If it doesn’t make an adequate profit under this scenario you should seriously consider whether it is worth the risk.

It is possible to make good money property trading. It is also easy to get it wrong and make losses, at least on some trades. Losses on even one or two trades will reduce your overall return. Trading is relatively high risk, and this should always be kept in mind.

Another factor often not considered is whether you are a “trader” at heart. Not many of us are, perhaps less than 12.5% of people are natural traders. People that aren’t natural traders not only have to battle the market to make their profit, but they also have to battle themselves. Sure, they can overcome their natural inclinations and learn to become traders, but don’t overlook the stress that may be caused by following a strategy that is not natural to your investment personality.

If you wish to do property trading then it is important that:

• you have done your research and numbers
• you’re prepared to put the effort in and shoulder the risk 
• the anticipated margin is large enough to cover the risk 
• you understand the tax implications 
• you have set up the correct structures 
• you can handle the stress 
• you have a workable plan “B” if it goes wrong.

If you haven’t done property trading before do take professional advice and talk to your accountant before hand.