To illustrate how to formulate a strategy, we will use the following example. Firstly, you should complete the following activity so that you understand the situation.
|Glenn and Diane Murdoch have presented at an interview with you in relation to a property investment opportunity. They are currently both aged 44 with two children in secondary school. One will complete secondary studies in two years’ time and commence university; the other will complete secondary schooling in four years’ time. Glenn is a human resource manager with a large food-store chain and Diane works as a receptionist at a local doctor’s surgery.
Note: Glenn’s car is provided by his employer and is fully maintained by them.
Glenn and Diane have expressed their desire for investments to provide some tax relief and grow ahead of inflation. Their reason for seeking a property investment is to provide both a residence for their daughters to use for their university years and, after that time, to provide retirement income and eventually an inheritance.
Other goals include wanting to assist with their daughter’s HECS fees through university, as well as being able to travel extensively in their retirement. It is for this latter purpose that the share portfolio has been established.
|From these details, what would the Murdochs currently have available for a property investment?|
The clients are not seeking income directly from the investment before they retire.
They did not specifically note growth as an issue, but rather associated growth with inflation.
The clients have stated that they wish to reduce their taxation burden.
This was a concern for the clients, they wish to have their investment hedge inflation to ensure that the income provided will assist them in their retirement years.
The clients have noted that this property should be able to be used as an inheritance. This would indicate that the intention is to hold this for the long term throughout retirement, 17 or more years away.
So far we know that the Murdochs are seeking to reduce their tax and provide themselves with a hedge against inflation. It might be that a recently developed property in a growth area would be appropriate.
We now need to consider some further issues:
The property is intended for use by the Murdoch children as a residence during their university years and should be close to services that will allow them easy access to their university.
The clients have not expressed any interest in developing a property.
The clients have identified additional costs such as HECS fees and travel in retirement and they have non-property assets that they wish to retain. Keeping their costs down would be of interest to these clients. These further issues indicate a more specific type of property investment that it be residential and provide easy access to their university, so that it can be used by the Murdoch children.
The investment opportunity is shaping up to be an established property. While maintenance was not noted as an issue, with two students as tenants their aim will be to concentrate on their studies and maintenance of the property should be kept to a minimum. This could indicate a unit or townhouse rather than a larger block that would require more maintenance.
Consideration of the time frame also needs to be made. The eldest daughter will not be attending university for a period of two years and this may mean an off-the-plan development scheduled for completion within the two-year time frame could be considered.
The Murdoch’s current disposable income of $24,525 would service an interest-only loan of $306,000 based on an 8 percent interest rate ($24,525/0.08), which is approximately the long term average borrowing rate for mortgage loans in Australia (albeit that rates are at historic lows midway through 2016).
An off-the-plan investment could help keep costs down through probable savings on stamp duty. However, this varies between the states and you should understand the stamp duty rules for the relevant state. In addition, the delay in the need for funds may allow the use of a deposit bond, which would mean these clients would not have to use their own money to secure the property. Over a 12-month period the clients have shown their capacity to save $24,525, and it may be that they could save a further $20,000 toward the eventual purchase over the next 12 months.
At this point the potential risks to the client need to be assessed.
‘Purchase a unit or townhouse off the plan in a location which allows easy access to the university, close to public transport. Use a deposit bond to secure this and delay final funding for the 12-month development period. During this time, save a further $20,000 to help fund the property.’