What’s the bottom line?
A very important step in choosing an investment property is to have the cash flow figures worked for you to make sure that the property suits your financial circumstances.
There are several professional programmes designed for this purpose, but with any computer-generated information, the output is only as good as the input.
A qualified and professional Property Advisor will provide the assumptions their model is based on and explain why these are important.
Based on these assumptions after rent and tax rebates and all associated costs, the property should return approximately + $35 per week to the investor.
This result assumes that the tax rebate of $4,420 is collected week by week after submitting a PAYG Withholding Variation. If it weren’t, then the investor would need to contribute approximately $50 per week.
Calculated by taking away the expenses ( interest cost and the rental expenses) from the income the property generates (rent) : $21,403 – $16,195 – $7,818 = – $2,610 / 52 = $50.19 per week:
Manipulating inputs such as anticipated rent, vacancy rates, inflation rates etc. will distort the truth and impact the bottom line result, making the costs appear better than they are or implying growth in capital value and rental income that cannot be guaranteed.
Be wary of rental guarantees – these sometimes provide a subsidised rent from the developer or the vendor at higher than market rates for a limited time. These can be very worthwhile and a great way to start with rental income right from the point of settlement, BUT if the cashflow is worked based on this ‘inflated’ rent, it will not give an accurate long term view of the holding costs. Sometimes they are used, and after the guaranteed period ends, the property owner receives a shock when suddenly they are asked to contribute more to the property than was projected at the point of purchase. Always ask your advisor to work the figures at verified market rates to see if you are still comfortable with the bottom line.
However, if the vendor is offering a rental guarantee that corresponds to current verified market rates or has identical properties in another development already achieving that rent, then the guarantee is a legitimate bonus.
A powerful way of looking at the affordability of a property investment purchase is to see who will pay to cover the holding costs of the property.
In this particular case, after rent and importantly, PAYG tax credits are collected, the property costs, on average, are serviced by both the tenant and the ATO:
One of the considerations for choosing
a particular type of property might be
the stamp duty and servicing costs payable
One of the advantages of buying a house and land package is that the contract is in two parts, and stamp duty is levied on the land component alone.
Once the land is registered and settled, ownership is transferred to the investor. The building plans are then stamped in the new owner’s name, a process that may take up to 6 weeks or longer, depending on the particular council process.
The house is then built in stages generally over about 6-9 months. When you allow for council permits to be issued, the build process and then occupation certificates to be issued at the end of construction, and allowing for delays due to inclement weather, a house and land package can take up to 12 months or more to complete.
Typically, the stages for house construction and the percentage progress payments are:
One month after the land settles, the lender will require interest to be paid on the portion of the loan that has been drawn down to date. As the build progresses through the stages, the lender funds more progress payments, the outstanding balance grows, as do the repayments.
Servicing the debt while a house and land package is built is like making ‘mini mortgage payments’. These payments become progressively larger until the first full mortgage instalment is due one month after the final progress payment has been made.
Assume a house and land purchase in Qld, for $430,000:
1.Land component $200,000
2. Stamp Duty on the land = $5425
3. House contract = $230,000
4. Borrowing 100% of the purchase price (costs covered by buyer)
5. Interest-only loan at 4.5% pa.
*Note: It is assumed for the sake of a working example that the stages of building happen in discrete months – in reality, some steps may happen more quickly or more slowly.
When we consider the difference between purchasing a single or a 2 part contract of the same value:
*using an example of Qld stamp duties
Had the purchase been a single contract at $430,000, the stamp duty would have been levied on the entire purchase price = $13,475
The house and land duty payable on the land is $5,425, but the debt has to be serviced during construction bringing the total outlay to $14,916
It’s worth noting that the interest costs vary for a host of reasons, including monetary policy to smooth the business cycle. Currently, the total interest cost to fund the construction would be significantly lower due to the record low current interest-rates.
In contrast, stamp duty rates are not dialled up and down as conditions in the economy and housing market change. As a result, in a low-cost credit climate, 2 part house and land contracts may be more even more cost-effective and attractive given the relative reduced initial outlay.
The land value and the proportion of the land in the overall package price will also vary from place to place as do stamp duty rates and therefore the comparative affordability of single contract compared to a 2 part, house and land construction will differ.
Stamp duty and interest during construction are offset against capital gains tax obligations when the property is eventually sold.