Generation X Case Study
Intelligent Property Investment
Future Estate eBooks Series: Generation X Case Study
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CLIENT PROFILE Gen X, born between early 1965 and 1981, have typically not yet generated retirement savings to the same extent as prior generations, however are defined by recent studies as highly educated, active, balanced, happy and family-oriented. The table below summarises a hypothetical client profile of this generation.
Born between 1965 – 1981 Aged 30 – 50, typically approaching peak income earning capacity $100,000 – $500,000 SMSF balance Long term investment horizon given 10 – 30 years from retirement Growth focus with willingness to accept higher near term return volatility Negative gearing considered acceptable Earlier stages of property portfolio construction
Future Estate offers a range of investment alternatives that may be suitable to Gen X with varying risk profiles and investment horizons, including:
Investment Options
Suitable Investors
Investment Horizon
Manufactured Equity Product (MEP)
Seeking to build equity in investment property within SMSF
Typically 2 years with private ownership at completion
Seeking to build a substantial cash positive investment portfolio over time
10 – 20 years
MEP Reinvestment Program
Preferred Income Units (PIU)
Pre-Sale Purchase
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Seeking debt-like investment with enhanced interest-rate-like returns Seeking direct property ownership with no equity risk during construction
Future Estate eBooks Series: Generation X Case Study
Typically 2 years
Typically 2 years to completion then generally 5 – 10+ years
mep at a glance Manufactured Equity Products (MEPs) are suited to Generation X’ers seeking to grow a substantial investment property portfolio within their SMSF.
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
Typically $100,000 – $150,000 equity
Generally $400,000 – $600,000 Australian capital cities
n
Key infrastructure and employment hubs of mining regions
n
Affordable high quality investment property
n
Market Focus
High yields, low rental vacancy and broadly accessible price point
n
Using our Reinvestment Program, SMSFs can build a $12.8m positively geared investment portfolio over 20 years, all from an upfront investment of $125,000 and an annual contribution of $5,000 for the first 10 years.
Future Estate eBooks Series: Generation X Case Study
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CASE ASSUMPTIONS Conservative Case Assumptions Terms
Details
Investor contribution
$125, 000
Investment term Property value
20 years $500, 000
Stamp duty MEP investment amount
4% $125 ,000
Comments Initial contribution. $5,000 p.a. thereafter Suitable for Generation X’ers 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
Rental income
$600
Ownership costs
$7,000
Per week. Assumed to grow at 4% p.a. Including maintenance, body corporate and other costs. Assumed to increase at 5% p.a.
Depreciation tax shield
$10, 000
Tax benefits of depreciation expense
Initial loan amount
$375, 000
Property value minus MEP investment amount
Implied LVR Loan term Loan interest rate
75% 30 years 6.5%
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 20-year period. The investor makes an initial contribution of $125,000 and a further annual contribution of $5,000 for the first 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. For Years 11-20, all cash inflows will be used to repay loan principal on the existing property portfolio.
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: Generation X Case Study
PORTFOLIO VALUE & EQUITY Portfolio Value $16,000,000 $14,000,000
Portfolio Value
$12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $0 1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
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 $12.8m portfolio over 10 years.
Portfolio Implied Equity $10,000,000 $8,750,000
Implied Equity
$7,500,000 $6,250,000 $5,000,000 $3,750,000 $2,500,000 $1,250,000 $0 1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Years Source: Future Estate
Low
Conservative
Target
Our MEP Reinvestment Program can assist Generation X’ers in building substantial equity within 10 years.
Future Estate eBooks Series: Generation X Case Study
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CASH FLOW & LEVERAGE Portfolio Net Cash Flow $120,000 $105,000
Net Cash Flow
$90,000 $75,000 $60,000 $45,000 $30,000 $15,000 $0 1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Years Conservative
Low
Source: Future Estate
Target
Our MEP Reinvestment Program can assist in generating positive cash flow for Generation X’ers. Rental income can serve as a component of overall investment strategy and as an important source of retirement income. Within 15 years, Gen X’ers can build positive cash flow of between $76,537 and $113,671 per annum. Portfolio Leverage 80% 70% 60% 50% 40% 30% 20% 10% 0% 1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Years Source: Future Estate
Low
Conservative
Target
The gearing ratio of the MEP portfolio declines gradually as portfolio income is used to repay loan principal over time. Based on assumptions, the Gen X investor is forecast to have relatively low portfolio growing of between 39% and 54% in 15 years. The investor may elect to sell some properties of retirement to achieve an ungeared portfolio.
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Future Estate eBooks Series: Generation X Case Study
PORTFOLIO GROWTH MEP Portfolio Growth (Year 1-10)
MEP under construction Completed property
1
2
Source: Future Estate
3
4
5
6
7
8
9
10
Years
The MEP Reinvestment program allows the investor to build a substantial property portfolio over a 10-year period. The accumulated loans from the properties from Year 1 to Year 10 will be paid off from Year 11 to Year 20.
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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: Generation X Case Study