Baby Boomer Case Study
Intelligent Property Investment
Future Estate eBooks Series: Baby Boomer Case Study
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CLIENT PROFILE The Baby Boomer generation traditionally represents the largest demographic group in Australian society and has a large representation in SMSF. Born between 1947 and 1965, this generation represents the largest pool of retirement savings in Australia. The table below summarises a hypothetical client profile of this generation.
Born 1947 – 1965 Retired or approaching retirement, often deferred due to GFC Generally up to $500k assumed SMSF balance of savings Moderate risk profile, with focus shifting to income generation Seeking to recover losses from GFC and build retirement assets Property offers a means to grow asset base and retirement income Property portfolio is usually geared with positive cash flow, seeking lower borrowings
Future Estate offers a wide range of investment alternatives suitable to Baby Boomers with varying risk profiles and investment options including:
Investment Options Manufactured Equity Product (MEP)
Preferred Income Units (PIU)
Pre-Sale Purchase
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Suitable Investors
Investment Horizon
Seeking to build equity in investment property (often within SMSF) and to grow a substantial portfolio over time
Typically 2 years with private ownership at completion
Seeking debt-like investment with enhanced interest-rate-like returns
Typically 2 years term
Seeking direct property ownership with no equity risk during construction
Typically 5 – 10 year investment horizon
Future Estate eBooks Series: Baby Boomer Case Study
mep at a glance Manufactured Equity Products (MEPs) are suited to Baby Boomers seeking to grow a substantial investment property portfolio within their SMSF. In many cases, once completed, Future Estate properties can be positive cash flow to the MEP investor.
Key Term What is it?
Target Returns
Investment Term
Details Property managed fund (equity)
n
Private property ownership on building completion
n
Typically return circa 15% of the property aquired e.g. $75,000 on a $500,000 property
n
During development of the project
n
Generally around 2 years
n
Investment Amount
n
Property Price
n
Geographical Focus
Market Focus
Typically $100,000 – $150,000 equity
Generally $400,000 – $600,000 Australian capital cities
n
Key infrastructure and employment hubs of growth regions
n
Affordable high quality investment property
n
High yields, low rental vacancy and broadly accessible price point
n
Using our reinvestment program, the investor can build a $6.3m positively geared investment portfolio over 10 years, all from an upfront investment of $125,000 and an annual contribution of $10,000 for 10 years.
Future Estate eBooks Series: Baby Boomer Case Study
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ASSUMPTIONS Conservative Case Assumptions Terms
Details
Investor contribution
$125, 000
Investment term Property value
10 years $500, 000
Stamp duty MEP investment amount
4% $125 ,000
Comments Initial contribution. $10,000 p.a. thereafter Suitable for Baby Boomers Generally $400,000 – $600,000, 4% capital growth Percentage of property value Returned to the investor at project completion
MEP investment term
2 years
Typical length of an MEP project
Tax rate on MEP return
16.5%
Based on SMSF tax rate (including medicare levy)
Rental income
$600
Ownership costs
$7,000
Depreciation tax shield Initial loan amount
$10, 000 $375, 000
Implied LVR Loan term Loan interest rate
75% 30 years 6.5%
Per week. Assumed to grow at 4% p.a. Including maintenance, body corporate and other costs. Assumed to increase at 5% p.a. Tax benefits of depreciation expense Property value minus MEP investment amount Loan amount divided by property value Principal and Interest repayments Annual rate based on current lending market condition
In this example, we illustrate how an investor can build a substantial positively geared portfolio over a 10-year period. The investor makes an initial contribution of $125,000 and a further annual contribution of $10,000 for 10 years. Under the MEP Reinvestment Program, it is assumed that any end-of-year cash surplus is reinvested into as many MEPs as permitted by the cash balance.
Variation Assumptions Low Case
Conservative Case
Target Case
MEP Return
5%
10%
15%
Capital Gain
2%
4%
6%
Rental Growth
2%
4%
6%
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Future Estate eBooks Series: Baby Boomer Case Study
PORTFOLIO GROWTH MEP Portfolio Growth (Year 1-10)
MEP under construction Completed property
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2
Source: Future Estate
3
4
5
6
7
8
9
10
Years
Using our Portfolio Accelerator Program, MEP investors can build a property portfolio comprising 12 properties ($6.3m) over a 10 year period.
Future Estate eBooks Series: Baby Boomer Case Study
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PORTFOLIO VALUE Portfolio Value $7,000,000
$6,000,000
Portfolio Value
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$0
1
2
3
4
5
6
7
8
9
10
Years Conservative
Low
Source: Future Estate
Target
Assuming Target MEP returns are achieved and each MEP takes 2 years to complete, an investor can build a $6.3m portfolio over 10 years.
Portfolio Implied Equity $4,000,000 $3,500,000
Implied Equity
$3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000
$0
1
2
3
4
5
6
7
8
9
10
Years Source: Future Estate
Low
Conservative
Target
Our MEP Portfolio Accelerator Program can assist Baby Boomers in building substantial equity within 10 years.
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Future Estate eBooks Series: Baby Boomer Case Study
net CASH FLOW Portfolio Net Cash Flow $35,000
$30,000
Net Cash Flow
$25,000
$20,000
$15,000
$10,000
$5,000
$0
1
2
3
4
5
6
7
8
9
10
Years Source: Future Estate
Low
Conservative
Target
Our MEP Portfolio Accelerator Program can assist in generating positive cash flow for Baby Boomers during the transition to retirement. Upon retirement, investors may elect to retain the portfolio in its entirety, or dispose of certain assets to retain the balance on an ungeared basis, achieving potentially even higher positive cash flow.
Future Estate eBooks Series: Baby Boomer Case Study
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If you would like more information about us and our advisory services, investment properties and products, simply call, email or visit.
(03) 9988 2900 info@futureestate.com.au www.futureestate.com.au @futureestate future.estate future estate
Copyright Š Future Estate Group Pty Ltd 2014
This document contains general information and does not contain personal advice or financial product advice. This information has been prepared without taking account of your objectives, financial situation or needs. Accordingly, before acting on this information and making financial decisions, you should consider whether this information is appropriate for you and are recommended to seek independent financial, investment, tax and/or legal advice having regard to your own objectives, financial situation and needs. This information may contain material provided to Future Estate Group Pty Ltd by third parties. While such material is published with necessary permission, Future Estate Group Pty Ltd and its related entities accept no responsibility for the accuracy or completeness of this information, nor endorses it. To the maximum extent permitted by law, Future Estate Group Pty and its related entities disclaim all liability for any loss, costs or damage which arises in connection with the use or reliance on the information and material contained in this document. Any forward looking statements and estimates are provided as a general guide only and should not be relied upon as an indication or guarantee of future performance. Furthermore, past performance is not a true indicator of future performance. Any past performance information in this document has been given for illustrative purposes only and should not be relied upon as an indication of future performance.
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Future Estate eBooks Series: Baby Boomer Case Study