The real costs behind hit reality show
The popular television show The Block provided fans with plenty of prime time entertainment but it was also an example of how hard it can be to make money from residential property development.
The show had four couples competing against each other to see who could make the biggest profit from renovating one of four very run down homes and then selling them at auction.
The auction at which the houses were sold was broadcast live and saw winning pair Ben and Libby take top spot, when their home sold for $961,000, making them a profit of $157,000.
Two of the other homes also netted the couples who renovated them profits of $64,000 and $11,000 respectively while the sale of the fourth home produced no profit at all.
So the average profit across the four homes - $58,000.
However in a real life situation, anyone undertaking a similar exercise would have been unlikely to have walked away with that much money in their pocket.
Valuation records show that the four North Shore houses were bought in February for $635,000 purchased by the production company behind the show.
The purchases were settled during March and April with a mortgage to Westpac over each of the houses which secured $952,000 plus interest.
That type of funding arrangement is fairly common where a property is being redeveloped.
The loan is usually provided on an interest-only basis and the bank advances the money to buy the property, and then progressively provides further money to pay for renovations as they are carried out.
The total amount loaned and the accrued interest is then repaid when the renovations are complete and the property is sold.
However, in this current economic environment, a bank would be unlikely to provide a young couple with all of the finance to undertake such a project unless they had other assets they could pledge as security or a helpful guarantor such as Mum or Dad.
The interest clock on the mortgage would start ticking as soon as the purchase of the properties was settled.
Assuming an interest rate of 5.45 per cent, interest on the $635,000 purchase price would have been around $1327 a fortnight, and that would have risen to $1990 a fortnight if the full $952,000 available under the mortgage was draw down.
On top of that, the owners would have been liable for rates and insurance on the properties from the time they acquired them until the auction sales contracts were settled.
The rates on each of the properties was $2606 a year, so once insurance and water and electricity charges were added, the couples renovating the homes would have faced substantial expenses even before the first nail was hammered.
Then they would be faced with sales expenses such as the agent's commission and legal costs which would be deducted from the sale price.
Whether the prices the homes achieved at auction were an accurate reflection of the market is hard to say.
Unlike most homes which go up for auction, these were sold fully furnished and the huge amount of publicity the show attracted would certainly have helped their cause when it came to auction time.
But regardless of whether the publicity the television show generated helped push up the price or not, those considering undertaking a similar exercise would need to factor in that any profits arising from the sale would almost certainly be taxable.
So the $157,000 profit which brother and sister Ben and Libby made on their home would probably come down to about $105,000 once the tax man had taken his bite.
Tax would also have likely reduced the surpluses on the other two homes which sold at a profit to about $43,000 and $7400 respectively, which are pretty poor returns considering the large amounts of money involved and the huge risks associated with property renovation work.
But if it's difficult to make a buck from doing up and flicking on such properties, it's probably equally difficult to make money from them as an investment.
The Block was aired on TV3 and according to information on the broadcaster's website, each of the houses could potentially have generated rental income of $931 a week.
That seems high given that Real Estate Institute New Zealand figures show the median rent for a three-bedroom home in the Takapuna/Milford area is $550 a week, while according to Building and Housing figures, the upper quartile (top 25 per cent) of rents in that area is $640 a week.
Assuming they were able to be rented at $931 a week, that would give their new owners gross yields ranging from 6.1 per cent for the cheapest property, to five per cent for the most expensive.
If they were rented at the upper quartile rental figure of $640 a week, the gross yields would be in 4.4 per cent to 3.5 per cent range. That's less than an investor could achieve by sitting on their bum and leaving the money in the bank.
And the gross yield figures make no allowance for loss of income through periods of vacancy and ongoing expenses such as rates, insurance and repairs and maintenance. Those costs would reduce the yields on the properties even further.
Fortunately, none of that should bother the show's many fans, because while The Block was described as reality TV, it was first and foremost a piece of popular entertainment.
- © Fairfax NZ News