SMSF_GenY_

Generation Y Case Study

Intelligent Property Investment

Future Estate eBooks Series: Generation Y Case Study

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CLIENT PROFILE The Gen Y generation comprises people born after 1982 (30 or below). This generation may have recently entered SMSF, often by way of involvement in a family fund. The table below summarises a hypothetical client profile of this generation.

Born post 1982 Young and in early stages of career Generally less than $100k SMSF balance or involvement in a family SMSF Likely higher risk profile Growth focus with long term investment horizon Property offers a means to grow asset base and retirement income Often little to no existing property portfolio

Future Estate offers a range of investment alternatives that may be suitable to Gen Y 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

20+ years

MEP Reinvestment Program

Preferred Income Units (PIU)

Pre-Sale Purchase

Seeking debt-like investment with enhanced interest-rate-like returns Seeking direct property ownership with no equity risk during construction

Typically 2 years

Typically 2 years to completion then generally investment horizon of 5 – 10+ years

In this Case Study we illustrate how a Gen Y investor with only $50,000 initially can accumulate a substancial portfolio over 20 years.

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Future Estate eBooks Series: Generation Y Case Study

at a glance This Case Study shows how a Gen Y investor can use an accumulation strategy requiring only $50,000 initially to build a portfolio. Initially the Gen Y investor invests in Preferred Income Units (PIU) for a period of 6 years until sufficient equity is available for Manufactured Equity Product (MEP) investment from Year 7.

PREFERRED INCOME UNITS AT A GLANCE Key Term Sector

Details Residential Property Preferred loans or preferred equity against a specific property project

n n

Target Returns

n

Investment Term

n

Investment Amount

n

Underlying Security / Asset

n

Geographical Focus

n

Investment Focus

15% + p.a.

Typically 2 years $50,000 and over Residential property projects Australia wide, with a focus on fundamentally robust markets “De-Risked” projects with substantial pre-sales cover, conservative gearing, strong returns and sound due diligence outcomes

n

Manufactured Equity Products (MEPs) are suited to Generation Y’ers seeking to grow a substantial investment property portfolio within their SMSFs.

MEP AT A GLANCE Key Term

Details Property managed fund (equity) Private property ownership on building completion

What is it?

n

Target Returns

n

Investment Term

n

n

Typically return circa 15% of the property aquired e.g. $75,000 on a $500,000 property During development of the project Generally around 2 years

n

Investment Amount

n

Property Price

n

Typically $100,000 – $150,000 equity Generally $400,000 – $600,000 Australian capital cities Key infrastructure and employment hubs of mining regions

Geographical Focus

n

Market Focus

n

n

Affordable high quality investment property High yields, low rental vacancy and broadly accessible price point

n

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CASE ASSUMPTIONS Conservative Case Assumptions Terms

Details

Comments

Investor contribution

$50, 000

Initial contribution. $5,000 p.a. thereafter.

Investment term

20 years

Suitable for Generation Y’ers.

Property value

$500, 000

Generally $400,000 - $600,000, 4% capital growth

Stamp duty

4%

Percentage of property value

MEP investment amount

$125 ,000

Returned to the investor at project completition

MEP investment term

20 years

Typical length of an MEP project

Tax rate on MEP return

16.5%

Rental income Ownership costs Depreciation tax shield Initial loan amount Implied LVR Loan term Loan interest rate

$600 $7,000 $10, 000 $375, 000 75% 30 years 6.5%

Based on SMSF tax rate 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 20-year period. The investor invests in three consecutive Preference Income Units (PIUs) from Year 1 to Year 6, undergoes the MEP Reinvestment Program from Year 7 to Year 16 before repaying loan principal from Year 17 to Year 20. During the MEP Reinvestment phase, 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: Generation Y Case Study

PORTFOLIO VALUE & EQUITY Portfolio Value Loan Reduction

$18,000,000 $16,000,000 $14,000,000

Portfolio Value

MEP Reinvestment Program

$12,000,000 $10,000,000 $8,000,000 $6,000,000

Years 1– 6 the investor reinvests in PIU to accumulate funds for MEP investment in Year 7

$4,000,000 $2,000,000 $0 1 ... 6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

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 $16.0m portfolio by Year 20.

Portfolio Implied Equity $14,000,000

$12,000,000

Implied Equity

$10,000,000

$8,000,000

$6,000,000

$4,000,000

$2,000,000

$0 6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

Years Source: Future Estate

Low

Conservative

Target

Our Reinvestment Program in both PIU (Years 1–6) and MEP (Years 7–16) can assist Generation Y’ers in building substantial equity over 20 years.

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CASH FLOW & LEVERAGE Portfolio Net Cash Flow Loan Reduction Years 17 - 20

$140,000

$120,000 MEP Reinvestment Program Years 7 – 16

Net Cash Flow

$100,000

$80,000

$60,000

$40,000

PIU reinvestment period Years 1 – 6

$20,000

$0 1 ... 6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

Years Conservative

Low

Source: Future Estate

Target

Our MEP Reinvestment Program can assist in generating positive cash flow for Generation Y’ers. By Year 20, the investor is forecast to be generating $120,000 to $135,000 in positive cash flow annually.

Portfolio Leverage 70%

60%

50%

40%

30%

20%

Reinvest initial $50,000 until sufficient to invest in MEP Start investing in MEP and building portfolio

10%

0% 1 ... 6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

Years Source: Future Estate

Low

Conservative

Target

After commencing portfolio accumulation in Year 7, the gearing ratio of the MEP portfolio declines gradually as portfolio income is used to repay loan principal. By Year 20, portfolio growing is forecast to be between 30% – 46% and could be fully repaid by Year 25. This enables a Gen Y investor to generate significant positive cash flow leading into retirement.

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Future Estate eBooks Series: Generation Y Case Study

PORTFOLIO GROWTH MEP Portfolio Growth (Year 7-16)

MEP under construction Completed property

1 – 6 Source: Future Estate

7

8

9

10

11

12

13

14

15

16

Years

For Gen Y investors without sufficient funds to invest in direct property or MEP, Preferred Income Units (PIU) provide a viable alternative. By reinvesting in PIUs, plus $5,000 annual savings, Gen Y can accumulate sufficient funds to invest in MEP by Year 7. By Year 7, a Gen Y investor with $50,000 could be in a position to begin a portfolio accumulation phase.

The MEP Reinvestment Program allows the investor to build a substantial property portfolio from Year 7 to Year 16.

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If you would like more information about us and our investment products, simply call, email or visit.

1300 future (388873) info@futureestate.com.au www.futureestate.com.au @futureestate future.estate future estate

Copyright Š Future Estate Group Pty Ltd 2012

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.

Future Estate eBooks Series: Generation Y Case Study

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