TaleOf2Properties%20F

A Tale of two properties

Intelligent Property Investment

Future Estate investment products enable investors to cut out typical developer’s profit and access properties at near cost price.

This eBook does not constitute an investment offer. Prospective investors are recommended to read IM or PDS for further information. No guarantee with regard to future investment performance is made or implied. Whilst every effort has been made to ensure accuracy, no reliance can be placed upon it by recipients.

FUTURE ESTATE EBOOK SERIES: A TALE OF TWO PROPERTIES1

In this eBook, you will learn about some of the benefits of investing in new property when compared to older, existing property.

Ben AndersonManaging Director and Founder

Would you like to learn the secrets of new property versus old?

Would you like to learn about the protection afforded to you under new building warranties?

Would you like to learn how to improve after tax cash flow using depreciation and other allowable deductions on new investment property?

Would you like to learn how to further enhance your cash flow by investing in new investment property at wholesale, not retail, price?

If you answered ‘Yes’ to any of the above, please read on.

Yes No

Yes No

Yes No

Yes No

FUTURE ESTATE EBOOK SERIES: A TALE OF TWO PROPERTIES 2

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.

At Future Estate we concentrate on newly developed properties. We believe the advantages of new versus old are compelling, in particular the significant cash flow benefits.


Building WarrantiesJust 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 MaintenanceGenerally, the older the building, the higher the maintenance costs. In addition, unexpected contingent levies for repairs is more likely for older buildings than new 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 more and the possibility of structural repairs is likely to be more. If you liken it to an older car versus a newer one generally the running costs of the older one are significantly more.

DepreciationThe depreciation benefit of purchasing a new property is usually significant and equals approximately 2.5 % of the building cost (assume straight-line depreciation over a useful life of 40 years). For example, if you buy an apartment priced at $500,000 with a building cost of $200,000, then you are entitled to an annual depreciation allowance of $50,000 for 40 years.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.

LocationOften 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 where you want, at a price you can afford.

Just some of the advantages are as follows:


State Government IncentivesState Government incentives offer investors in new property reduced stamp duty costs or even cash bonuses.

WA

NT

QLD

NSW

ACTVIC

TAS

Stamp duty concessionon first $540,000 of value for first home buyers. Build Bonus of $10,000 scrapped.

Stamp duty waived forfirst homes under$500,000. Expenses upto $2,000 reimbursed, forestablished homes only.

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.

Stamp duty discount of up to $7,000 for new

homes from July 1. $10,000 grant for new home buyers between

Aug and Jan 2013.

Benefit for first-time

buyer

$19,245 more thanpre-October 1

$550,000new home



$580,000new home

$640,000new home

$35,240

$29,168

$17,024

For FirstHome Buyers

<$650,000new home

$5,000

For FirstHome Owners

<$650,000new home

$15,000

SA

Stamp duty concessions for new apartments up to $500,000.

*

*To be reduced to $10,000 after Jan 1, 2014


Depreciation 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.

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:

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.

Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

$1,200

$1,100

$1,000

$900

$800

$700

$600

$500

$400

$300

$200

$100

$0

Diminishing Value MethodStraight Line Method

Allowable Deduction


Illustrative Example 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, higher quality property.

Explanation of Assumptions 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

Property Value $400,000 $400,000

Stamp Duty $11,825 $11,825

Conveyance Cost $2,000 $2,000

Weekly Rental Income $425 $500

Annual Vacancy 2% 2%

Building Cost $200,000 $300,000

Maintenance Cost $2,000 $800

Straight-line Depreciation Rate 2.50% 2.50%

Fittings Depreciation $20,000 $44,000

Loan Amount $280,000 $280,000

Interest rate 6.50% 6.50%

Loan Life (in Years) 25 25

Loan Cost (per Month) $3,306 $3,306

Inflation Rate 3% 3%

Capital Growth Rate 5% 5%

Taxable Income $115,000 $115,000

Marginal Tax Rate 32% 32%


$1,000

$0

-$1,000

-$2,000

-$3,000

-$4,000

-$5,000

-$6,000

-$7,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

After-Tax Cash Flow Comparison: Old vs New

Years

Aft

er-T

ax C

ash

Flow

Old New

As you can see from the chart above, by comparison to its older counterpart, the new apartment provides significant cost-saving 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.

The Cash Flow Difference is Significant

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

Over a 25 year horizon, the cash flow difference is $128,249.


Using the same assumptions as the new property example on page 9, you could invest in a Future Estate Manufactured Equity Product (MEP) and cut out the typical developer profit.

Assumptions

Investor Contribution $125,000

Property Value $500,000

Tax Rate on MEP Return 16.5%

Required Loan Amount $375,000

Weekly Rental Income 600

Rental Vacancy 2%

Rental Growth 4%

Capital Growth 4%

Costs $7,000

Cost Inflation Rate 5%

Plus Depreciation Tax Shield $10,000

Depreciation Shield Inflation Rate 5%

Interest Rate 6.50%

Loan Term 30

Stamp Duty (% of Property Value) 4%

MEP PORTFOLIO


Assuming Target MEP returns are achieved and each MEP takes 2 years to complete, an investor can build a $6.2m portfolio over 10 years

Assumptions

Low Case Conservative Case Target Case

5% average MEP return 10% average MEP return 15% average MEP return (Target)

2% capital gain 4% capital gain 6% capital gain

2% rental growth 4% rental growth 6% rental growth

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

Years

1 2 3 4 5 6 7 8 9 10

Port

foli

o Va

lue

Portfolio Value


PORTFOLIO VALUE


Our MEP Reinvestment Program can assist the investor to build a substantial euqity within the first 10 years of their investment.

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

1 2 3 4 5 6 7 8 9 10

Impl

ied

Equi

ty

Portfolio Implied Equity

Years


PORTFOLIO EQUITY

OPPORTUNITY


Our MEP Reinvestment Program can assist you to grow a $6.2m investment portfolio with $80,000 positive cash flow within 10 years.

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

1 2 3 4 5 6 7 8 9 10

Net

Cas

h Fl

ow

Portfolio Net Cash Flow

Years


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 “bricks and mortar” 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 we can help and what investment opportunities are currently available, please contact us on the details provided on the following page.

If you would like more information

about us and our investment products,

simply call, email or visit.

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[email protected]

www.futureestate.com.au

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TaleOf2Properties%20F