Dual Income Property Strategy

Transcription

1 Dual Income Property Strategy

2 Contents: WHAT IS A DUAL INCOME PROPERTY PAGE 4 ADVANTAGES PAGE 6 DISADVANTAGES PAGE 8 CASE STUDY PAGE 10 IMPORTANT CONSIDERATIONS PAGE 14 FREQUENTLY ASKED QUESTIONS PAGE 16 RECOMMENDATIONS PAGE 18 Questions? If you would like to make an appointment, or talk to a member of our team about any element of this booklet, please contact us via: Phone: info@alliancecorp.com.au Web: DUAL INCOME PROPERTY STRATEGY

3 Introduction from Managing Director Jason Paetow After investing in the property industry for 20 years and working as a buyers advocate for 14 years, I always try to drill the following key points into my clients: Most people will require a large property portfolio to achieve their financial goals (very unlikley one or two investments just will not generate enough capital growth and cash flow to set you up for retirement). Your property portfolio should include a diverse range of strategies including a range of different property types in a range of different locations. In order to purchase a large property portfolio you need to ensure you make smart investment decisions that don t impede your future borrowing capacity. Cash flow positive properties are an important part of your strategy. I have put together this e-book to provide some information about Dual Income Properties which are a relatively new concept in Australia. A number of our clients have purchased this type of property as part of developing a balanced portfolio. There are many advantages of this property type (if purchased in the right location) as they tend to be cash flow positive so they provide a small income each month while also protecting the investor s borrowing capacity. It s not often that new opportunities appear in the traditional space of long term residential development but this is one that can t be ignored. I hope you get something out of reading this booklet, and if you would like to talk about how the Dual Income Strategy could work for you, please contact a member of my team to arrange a complimentary strategy session. Best Regards, Jason. PAGE 3

4 What is a dual income property? A dual income property is an increasingly popular strategy we are implementing for our clients at AllianceCorp. This type of investment is essentially two dwellings that are built on the one block of land, allowing for two rental incomes. When helping our clients build large property portfolios, dual income investments are a great option as part of a diverse and well-balanced portfolio. Dual income properties have a number of different names: DUAL OCCUPANCY PROPERTY A dual income property is sometimes referred to as a dual occupancy property as you will receive two sets of rental income from the one parcel of land. DUAL KEY PROPERTY A dual key property is generally the one property that is divided into two dwellings - each dwelling has its own entrance and its own amenities such as bathrooms and a kitchen. DUAL DWELLING PROPERTY A dual dwelling property is one block of land with two dwellings on it. Why are they now being built? Although dual income properties are relatively new, they are becoming increasingly more popular for a range of reasons: ATTRACTIVE TO LOCAL GOVERNMENTS Dual income properties are attractive to local governments as they provide more dwellings while utilising less land in the region. More dwellings increase the population in the region which is great for local business and the overall development of the council area. AFFORDABILITY Housing affordability is an increasing issue for Australians. As a dual income property utilises less land per dwelling and the size of the dwelling is generally smaller than a single house built on the same size block of land, each dwelling is generally more affordable for renters and buyers than with a single occupancy dwelling. SHORTAGE OF LAND IN THE INNER CITY In most cities it is desirable to live close to the city centre due to proximity to amenities and infrastructure - not to mention more people work close to the city. As the population in Australia grows, there is greater demand for properties. Dual income properties allow more people to live on the one parcel of land. DUAL INCOME PROPERTY STRATEGY

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6 Advantage of dual income properties: PROVIDE CASH FLOW POSITIVE INCOME Since a dual income strategy involves purchasing only one parcel of land that contains two properties, the investor can benefit from two streams of rental income at a full market rate. This allows you to receive almost 50% higher rental yield compared to what you would receive with a traditional home. LOWER RISK OF DECREASED CASH FLOW DUE TO VACANCY With two dwellings, even if one property is unoccupied for a period of time, rental income will still be received on the other property so there is less risk of cash flow decreasing dramatically at any one time. CONSTANT GROWTH FACTOR The continuing demand for housing in key markets in Australia is fuelled by strong population growth. By purchasing a dual income property in a key market in Australia, history would suggest the investment would experience strong capital growth over time and consistently high rental yields. GREAT TAX DEDUCTIONS As dual income properties are generally new, investors can claim depreciation on the fittings and fixtures of the property at a much higher rate than what they could with an older, established property. This means significant tax savings can be made each financial year. Because there are double the fittings and fixtures, this means even more tax savings. DUAL INCOME PROPERTY STRATEGY

7 STAMP DUTY SAVINGS For investors who are building a dual income property, because they are purchasing only one block of land, they are only required to pay stamp duty for the one block of land, despite developing two dwellings. This means the investor is paying half as much in stamp duty as they would purchasing two dwellings on separate blocks. IMPROVE BORROWING CAPACITY Because a dual income property provides two streams of rental income and can often be positively geared, the investor does not need to dip into their own pocket to service costs associated with the property once it is established. This means that the investor can afford to service additional investment loans in the future and can expand their portfolio faster. SUBDIVISION OPTION Some dual income properties may fit the criteria to be subdivided so that each dwelling will exist on a separate title. This increases the value of each property and enables the investor to sell each dwelling individually. AFFORDABILITY All-in-all, dual income properties are a much more affordable investment option that a single dwelling. The investor pays less on stamp duty, receives greater rental yields and can claim a high rate of depreciation given that the property is new. RESALE OPTIONS Dual income properties are an attractive investment due to the vast options available for the property in the future. They are an attractive property type for all ages and family sizes as it is adaptable to everyone s needs. A dual income property provides many options such as living in one dwelling and renting out the other or turning the second property into a home office. Selling one half of the property for the price it took to pay for the whole block of land whilst still owning the other half. Aside from either selling on one or two titles, another option is to convert the dual property into one dwelling for home buyers that require a large home. PAGE 7

8 Disadvantages of dual income properties: MORE EXPENSIVE TO PURCHASE ONE DUAL INCOME PROPERTY THAN ONE SINGLE OCCUPANCY PROPERTY With two dwellings being built on the one parcel of land, it s more costly than a traditional home as there is a need for double of all amenities such as bathrooms and kitchens. Another important addition being a firewall to provide a safe environment for the occupants to live in. These increased costs can bump up the total purchase price to as much as $600,000. RESTRICTION ON AVAILABILITY With a high demand for dual income properties, the supply for these homes is quite restricted. They are not available in all locations around Australia so sourcing these properties can be challenging. DUAL INCOME PROPERTY STRATEGY

9 LIMITED CAPITAL GROWTH WITH A CASH FLOW POSITIVE STRATEGY As dual income homes are generally cash flow positive properties, they tend to experience slower capital growth than what you might expect from a negative geared property. However, the slower capital growth is replaced by immediate positive cash flow and increased rental yields due to inflation and rental demand in the area. Investors also have the option to create more equity through subdividing the property. VALUATION VARIANCES Valuers rely on comparable sales in the area to value a property. Because this type of property is often a new property in a developing area where sales data does not exist, it is common for the property be valued under the asking price for the property. Because dual income properties are also a new concept this adds to the lack of comparable sales data. On top of this valuers tend to be conservative with their estimates to minimise their risk when acting on behalf of the banks. There are options to deal with this short falls in valuations which we cover later in this booklet. PAGE 9

10 Case study - John & Sarah FINANCIAL GOAL: Retire in 15 years with an annual income of $100,000 from their property portfolio. Pay off their home-loan. Minimise the tax they pay each year. Help the kids financially. Travel. CURRENT CIRCUMSTANCES: Household income $130,000 Their home is valued at $700,000 with a $450,000 mortgage Monthly repayments on their mortgage are $260,000 Two kids INVESTMENT RECOMMENDATIONS FOR JOHN & SARAH: After assessing their financial situation, the AllianceCorp property coach advised John and Sarah that they needed to build a large property portfolio to achieve their long-term financial goals. In order to build a large portfolio, it is important for John and Sarah to ensure their first investment purchase does not decrease their borrowing capacity by too much and prevent them from making further property investment purchases in the coming years. They looked at a negatively geared strategy close to Sydney and also considered a cash flow positive investment strategy with dual income property in Brisbane. DUAL INCOME PROPERTY STRATEGY

11 THE DUAL INCOME STRATEGY HAS THE FOLLOWING BENEFITS: As this is the couple s first investment, they are more comfortable with the thought of having two tenants providing two streams of rental income so there is less chance of the property ever being completely vacant. The additional income generated from the property after all expenses are paid will go towards paying off their home sooner. This has a compounding effect as it will also reduce the interest they pay on the home loan. Because purchasing this property actually increased the couple s household income, their borrowing capacity also increased providing more options to purchase additional investments in the near future. As the property is newly built, the couple can claim tax deductions on depreciation of $7000 per year. By utilising this strategy the client was able to setup a Master Facility using their existing equity. They were also able to ensure that they had a buffer in place to cover any unforeseen costs or shortfalls to provide them with peace of mind. The additional rental income with this strategy has increased John & Sarah s borrowing capacity to $718,000. Strategy 1: Negatively geared property in Sydney. If John & Sarah purchase a negatively geared property valued at $500,000, with a rental income of $400 per week, their borrowing capacity for the next property is $530,000. This only will leave enough funds to purchase one property at $500,000 with no buffer in place. Strategy 2: Cash flow positive, dual income property in Brisbane. If John & Sarah purchase a cash flow positive, dual income property, the potential rental income is $770 per week. The larger rental income increases their borrowing capacity to $718,000. This enables John & Sarah to buy multiple properties in the future and create a buffer. PAGE 11

12 Case study - John & Sarah continued LARGER BORROWING CAPACITY ALLOWS JOHN & SARAH TO SETUP A MASTER FACILITY With the cash flow positive strategy, because John & Sarah have an increased borrowing capacity, they can setup a master facility loan account without needing to cross-collateralise their investment property loans to their home giving them more control over their property portfolio. The additional funds in the master facility also provide them with more confidence to cover incidental costs including a valuation variance of $20,000. The client is able to put in place a loan buffer amount of $54,000 to cover any unforeseen circumstances in the future (i.e. if one of the properties was vacant for a period of time or the property required maintenance). This strategy brings in rental income of $770 per week. Once all costs associated with the property are paid, there is a surplus of $181 per week in additional income. John & Sarah can put this towards paying off their home loan sooner. MASTER FACILITY Home $700k Master facility $150k Investment property Value: $608k (90 % LVR) 90% LVR $54k Buffer $450k Mortgage $96k $20k Valuation variance $10,500 Costs (stamp duty, holding costs etc.) $76,500 $60k Deposit $181 per week surplus income, transferred into home loan account to pay off mortgage. DUAL INCOME PROPERTY STRATEGY

13 ADDITIONAL FINANCIAL BENEFITS FROM THE DUAL INCOME STRATEGY As you can see from the report over the page, this property has the following benefits: 1. Purchase costs are low due to stamp duty only payable on the land 2. Rental income is much higher due to dual tenants 3. Tax deduction is significant due to depreciation on new property 4. Cash amount after tax deductions is positive. Investment Analysis End of year Property value Purchase costs Investments Loan amount Equity Capital growth rate Inflation rate (CPI) Gross rent /week Cash deductions Interest (I/O) Rental expenses Pre-tax cash flow Non-cash deductions Deprec.of building Deprec.of fittings Loan costs Holding costs Total deductions Tax credit (single) After-tax cash flow Rate of return (IRR) Pre-tax equivalent Projections over 10 years yr 2yr 3yr 5yr 10yr $607, , , , , ,282 1 $10,500 $0 $643, , , , , ,720 $-35,773-5,375 26,542 60, , , % 5.00% 5.00% 5.00% 5.00% 5.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 2 $770 38,839 40,004 41,204 43,713 50, % 29,611 29,611 29,611 29,611 29, % 8,757 9,019 9,290 9,856 11,425 $ ,374 2,303 4,247 9, % 8,500 8,500 8,500 8,500 8,500 $45,000 6,000 5,200 4,507 3,385 1,655 $16,273 3,255 3,255 3,255 3,255 $6,000 6,000 62,122 55,585 55,162 54,606 51,192 $110, ,964 5,999 5,374 4, $0 9,435 7,373 7,677 8,440 9,837????? Your cost /(income) per week????? 4 (181) (142) (148) (162) (189) PAGE 13

14 Important considerations MANAGING VALUATION VARIANCES As mentioned in the previous chapter, it is common for a dual income strategy to be valued below the asking price of the developer. The reason for this is that because this property type is a new concept generally located in a new region where comparable sales data does not exist, valuers tend to be overly conservative in their estimates. Often the only comparable sales data available are new, five bedroom homes that don t include additional construction costs for extra bathrooms and kitchens - this dramatically increases the cost and value of a dual income property. In the event that the valuation falls short of the asking price, the following options are available: Ask for a copy of the valuation and review the report is there enough evidence to support the lower valuation such as direct comparable sales (other dual income properties in the area that have sold recently) or is the valuer just being conservative? Ask the bank to order another valuation. Use another bank to order the valuation. Go back to the builder and land agent and use the valuation to potentially negotiate a lower land price or decrease in building costs. DUAL INCOME PROPERTY STRATEGY

15 The above strategies will go along way to reduce the valuation variance, but won t always close the gap completely. This is why we recommend that this strategy is best suited to an investor who has enough funds to cover a small variance. LOCATIONS / COUNCIL APPROVED Understanding the council regulations is vital as they will differ from region to region. Before purchasing land to build, you need to be aware of the following: Does the land have council approval to build a dual income property? Does the dual income property structure follow council requirements in that location? Can each dwelling be rented out to separate occupants? What is the council s Local Environment Plan (LEP)? The principle environmental planning instrument used by councils to control land use and development decisions within the Local Government Area. The LEP has the authority to determine where and under what conditions homes or places can be developed. What is the council s Development Control Plan (DCP)? This plan ensures people follow specific planning guidelines to maintain development control of properties. COMMON MISTAKES AND OVERSIGHTS 1. Not being well informed Ensure you have conducted plenty of research on dual income properties and determined that this is the right strategy for you. Ensure that the location you are looking to purchase in is growing and best positioned to deliver good returns on your investment. 2. Ensure the property has an approved firewall The firewall that divides the dwelling must be certified to protect the property and occupants from heat, fire and fumes. Ensure that the firewall adheres to any regulations. 3. Council approval The local council must approve the dual income property and it is important to be aware that requirements differ from council to council. 4. Wasting money Some people throw their money down the drain by building a granny flat onto an already fixed property. 5. Location It is important to ensure that your chosen location has high demand for properties so that it is easy to attract renters. PAGE 15

16 FAQs 1. HOW DO DUAL INCOME HOMES PRODUCE POSITIVE CASH FLOW? Dual income homes produce positive cash flow by providing you with two rental incomes from the one parcel of land and helping you pay your mortgage as you go. For example, if the rental yield comes in at 7% and your mortgage payment is 5% on your loan, this automatically provides you with a positive income on the property. 2. CAN A DUAL INCOME PROPERTY BE BUILT ANYWHERE? No, they cannot be purchased anywhere due to council laws, land and title restrictions. Before you decide to buy, make sure to do your research on the area. HOW MUCH UPFRONT CASH WILL I NEED TO INVEST IN THIS STRATEGY? This really depends on your financial situation. If you already own your own property, depending on how much equity you have, you may be able to leverage against this to start purchasing a dual income property and only need to contribute an additional few thousand dollars to get started. On the other hand, you could need to put together a minimum deposit of $25,000-$35,000. It is important to consider your financial situation and long term objectives before the purchase. DUAL INCOME PROPERTY STRATEGY

17 3. HOW MANY BEDROOMS ARE TYPICALLY INCLUDED IN EACH DWELLING? The number of bedrooms vary in each dwelling depending on council guidelines and the design of the property. We often see dual income properties with three bedrooms in one and two in the other. In some cases we have also seen four bedrooms in one dwelling and two in the other. 4. WHAT IS THE POTENTIAL RENT VALUE? The rental yield on a dual income property generally falls somewhere between 5%-7% per annum. 5. WHAT IS THE STANDARD BUILD TIME? It can take approximately 4-8 months, depending on the size. This includes putting together contracts, planning and construction. Dual income properties tend to take longer to build as there are twice as many amenities and the need for a firewall. PAGE 17

18 Recommendations Positive cash flow investments such as dual income properties can be a great asset to balance your portfolio and give you access to a greater borrowing power. The key is to ensure that your strategy is solid and that you re aware of the risks. At AllianceCorp, our property coaches have a wealth of experience in crafting purchase strategies and can help you build your portfolio safely. Some recommendations we suggest before purchasing or building a dual income property include: Getting professional advice before you buy An industry professional or expert has a vast amount of knowledge in regards to various elements of the property industry. More and more buyers are realising the benefits of engaging a team of independent professionals to help build their property portfolios. They do this for convenience, time savings, expertise and to save thousands when negotiating purchase prices. Consider the market Make sure the area you want to build is in an attractive market where a dual income home would be suitable. Having a property that appeals to different renters is essential and be sure to build for your tenants and not for yourself. Understanding your finances Having a clear idea of your borrowing capacity is critical as you need to ensure your borrowing capacity will support your purchase. Most banks (depending on your financial position) will lend up to 95% of the value of the completed project. DUAL INCOME PROPERTY STRATEGY

19 Disclaimer The information presented, including any accompanying DVD ( the information ), is educational and general and it should not be construed as specific investment recommendations or advice. You, the reader or viewer, should seek personal advice from a licensed financial services provider as to the suitability or otherwise of the information to your individual situation before you make any financial decision. The laws relating to investment, taxation, benefits and the handling of money, and their interpretation and implementation by government authorities, are constantly changing and while every care has been taken to ensure the accuracy of the information: AllianceCorp, its employees or agents give no guarantee as to the accuracy and/or completeness of the information and accept no responsibility or liability (which is excluded to the fullest extent permitted by law) for any action taken by you on the basis of the information. Without limiting the generality of the foregoing, Jason Paetow and AllianceCorp make no representation or warranty, express or implied, as to the results to be obtained by you from the use of the information Questions? If you would like to make an appointment, or talk to a member of our team about any element of this booklet, please contact us via: Phone: info@alliancecorp.com.au Web: PAGE 19

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