A Tale of two properties
Intelligent Property Investment
FOREWORD
In this eBook, you will learn about some of the benefits of investing in new property when compared to older, existing property. Ben Anderson Managing Director and Founder
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Would you like to compare the difference between investing in new vs. old property?
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Would you like to learn about the protection afforded to you under new building warranties?
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Would you like to learn how to improve after tax cash flow using depreciation and other allowable deductions on new investment property?
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Would you like to learn how to further enhance your cash flow by investing in new investment property at wholesale, not retail, price?
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If you answered ‘YES’ to any of the above, please read on.
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FUTURE ESTATE EBOOK SERIES: A TALE OF TWO PROPERTIES
NEW OVER OLD How many times have you heard the old adages “safe as houses” and invest in “bricks and mortar?” Fine words indeed. Many people when considering investing in property look at older established properties. Often people do not fully appreciate the difference between old and new. For most property investors, there are a number of benefits to invest in new property. The advantages of new versus old are compelling, in particular the significant cash flow benefits.
FUTURE ESTATE EBOOK SERIES: A TALE OF TWO PROPERTIES
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advantages of new Just some of the advantages are as follows:
Building Warranties ■■
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Just like a new car, a new property generally comes with defect warranties, which reduces the maintenance costs in the early years of ownership. These warranties vary in different states; but most have a high level of protection for the new property owner that is not afforded to older buildings. For example, the new building warranty in Victoria covers you for the first 10 years from completion.
Ongoing Maintenance ■■
Generally, the older the building, the higher the maintenance costs. In addition, unexpected contingent levies for repairs is more likely for older buildings than new ones. It also means less of your valuable time spent dealing with maintenance issues in relation to your investment properties. It is also likely that with an older building the strata costs and maintenance costs will be higher and the possibility of structural repairs is likely to be more. If you compare it to an older car versus a newer one generally the running costs of the older one are significantly more.
Depreciation ■■
The depreciation benefit of a new property is usually significant and equates approximately 2.5% of the building cost. For example, if you buy an apartment priced at $400,000, with a building cost of $300,000, then you will be entitled to a depreciation allowance of $7,500. That’s based on 2.5% of the building cost, depreciated in a straight line over 40 years from the building’s completion. Please note that when you purchase a property you should always get a depreciation schedule from a reputable company to establish the deductions that will be allowable. At Future Estate, all purchases come with a full depreciation schedule prepared by a qualified professional so there is no doubt as to the allowances available.
Location ■■
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Often inner city houses are inaccessibly priced for many and generally offer low annual yields. New, smaller types of property such as apartments offer an affordable alternative for investors seeking premium and inner city locations. That way you can invest in the location you want, at a price you can afford.
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FUTURE ESTATE EBOOK SERIES: A TALE OF TWO PROPERTIES
government incentives State Government Incentives ■■
State Government incentives offer investors in new property reduced stamp duty costs or even cash bonuses.
Stamp duty concession on first $540,000 of value for first home buyers. Build Bonus of $10,000 scrapped.
NT QLD
SA
WA
Stamp duty concessions for new apartments up to $500,000. Stamp duty waived for first homes under $500,000. Expenses up to $2,000 reimbursed, for established homes only.
Stamp duty discount of up to $7,000 for new homes from July 1. $10,000 grant for new home buyers between Aug 2012 and Jan 2013.
NSW Benefit for first-time buyer
ACT VIC
$35,240 $550,000 $19,245 more than new home
TAS
From July 1, stamp duty reductions for first home buyers will increase from 20% to 30% on Jan 1, 2013, to 40% on Jan 1, 2014, and to 50% on Sept 1, 2014.
pre-October 1
$29,168 $580,000 $18,570 more than new home
pre-October 1
$17,024 $640,000 $10,024 more than new home
pre-October 1
$5,000 <$650,000 new home
For First Home Buyers
$15,000* <$650,000 new home
For First Home Owners
*To be reduced to $10,000 after Jan 1, 2014
FUTURE ESTATE EBOOK SERIES: A TALE OF TWO PROPERTIES
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deductables Depreciation ■■
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On top of the depreciation on cost, you could claim plant and equipment items, such as carpets, dishwashers, dryers, curtains and blinds and even free standing furniture. Many new properties come with some or all of these items included or as part of an associated “furniture pack”. Most older properties do not come with items that can be depreciated, or certainly not as many items, or to a lesser extent. The tax benefits may significantly increase if you factor in the allowable deductibles in the new property acquired. These benefits further enhance the equivalent after-tax cash flow generated by the property. You may choose one of two methods to calculate depreciation that can be claimed. The options are either the Straight Line Method or the Diminishing Balance Method. Under the straight line method, you can claim a fixed percentage of the initial cost over the useful life of that item. Under the diminishing balance method, you claim a certain percentage of the remaining value (after any depreciation) of that item at the end of the previous tax year.
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FUTURE ESTATE EBOOK SERIES: A TALE OF TWO PROPERTIES
deductables Illustrative example: Curtains costing $6,000 with a useful life of 10 years. Under the straight line method, the deduction would be $600 for each of the next 10 years, being 1/10th or 10% of the initial cost each year. Under the diminishing value method, the first year’s deduction would be $1,200, being 20% of the starting value. However in year 2, the deduction would be $960 (or 20% of the remaining balance, $4,800, after $1,200 deduction in the first year. This can be illustrated as follows:
Allowable Deduction $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0
Year 2
Year 3
Year 4
Year 5
Year 6
Straight Line Method
Year 7
Year 8
Year 9
Year 10
Diminishing Balance Method
The method that works best will depend on your circumstances however in both cases will substantially increase the equivalent after tax cash flow on the new property acquired.
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To illustrate the cash flow implications between investing in new property versus old, we provide a comparison between two $400,000 apartments; one old and one new. In these examples we have added the cost and depreciation of various deductable items such as a washing machine, fridge and dryer, and other items that came with the purchase of the new property but were not part of the old property purchase and added new curtains and blinds to both properties. Whilst the cost of the two apartments is the same, we have assumed the rental position is $425 per week for the older property and $500 for the newer property – reflecting the higher rents earned by newer property.
FUTURE ESTATE EBOOK SERIES: A TALE OF TWO PROPERTIES
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assumptions Explanation of Assumptions ■■
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We have assumed 70% of the purchase price of the property has been borrowed ($280,000). Interest rate is assumed at 6.5%. As you will see, most assumptions are held constant between the two examples, with the primary difference being lower maintenance costs and high deductable items for the new property.
Old
New
$400,000
$400,000
Stamp Duty
$11,825
$11,825
Conveyance & Other Purchase Costs
$2,000
$2,000
$425
$500
2%
2%
$200,000
$300,000
Maintenance Cost
$2,000
$800
Straight-line Depreciation Rate
2.50%
2.50%
$20,000
$44,000
Loan Amount
$280,000
$280,000
Interest Rate
6.50%
6.50%
25
25
$3,306
$3,306
Inflation Rate
3%
3%
Capital Growth Rate
5%
5%
$115,000
$115,000
32%
32%
Property Value
Weekly Rental Income Annual Vacancy Building Cost
Fittings Depreciation
Loan Life (in Years) Loan Cost (per Month)
Taxable Income Marginal Tax Rate
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FUTURE ESTATE EBOOK SERIES: A TALE OF TWO PROPERTIES
cash flow The Cash Flow Difference is Significant After-Tax Cash Flow Comparison: Old vs New $1,000
25
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14
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12
11
9
10
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3
2
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Years
After-Tax Cash Flow
-$1,000 -$2,000 -$3,000 -$4,000 -$5,000 -$6,000 -$7,000 Old
New
Figures are illustrative and indicative only. Will vary for individual properties and circumstances. Readers should seek independent advice in relation to their own personal circumstances prior to making any investment decisions
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As you can see from the chart above, by comparison to its older counterpart, the new apartment provides significant cash flow benefits. Typically the after-tax cash flow for the investor, using the assumptions on page 5, is $4,000 – $6,000 better each year. For new property, after-tax cash flow is never worse than $2,000 per annum, meaning $40 per week is sufficient to own the investment property. Strong cash flow generation enables investors to build a substantial property portfolio over time, rather than be burdened by excessive negative gearing.
Over a 25 year horizon, the cash flow difference is $128,249.
FUTURE ESTATE EBOOK SERIES: A TALE OF TWO PROPERTIES
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OPPORTUNITY
At Future Estate, we believe that in most cases the benefits of new property far exceed the alternative for property investors. We look for the best opportunities and spend considerable time in identifying projects in strategic locations that offer strong cash flow generation and long term growth potential. So, you can see the benefit of old versus new. And if you are investing in â&#x20AC;&#x153;bricks and mortarâ&#x20AC;? you should carefully consider the types of bricks and mortar you are investing in. By combining high cash flow generating new properties with our revolutionary Manufactured Equity Product (MEP), you can build a substantial positively geared investment portfolio - all without needing significant equity to do so. To find out how to access brand new investment grade property at wholesale prices, please read our exclusive Manufactured Equity Product (MEP) eBook. To find out how we can help and what investment opportunities are currently available, please contact us on the details provided on the following page.
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FUTURE ESTATE EBOOK SERIES: A TALE OF TWO PROPERTIES
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.