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For all the golfers out there, imagine walking out the door each morning and saying to your partner, “See you in a few hours, I’m going golfing!” Or as an investor, funding this lifestyle for your tenants. How much would you pay for this investment, and what weekly rent could you get?
Many deals come across the Real Wealth Australia Mentors desk but a recent one piqued our interest. On offer was a brand new three-level, three-bedroom, two-bathroom property with two-car garage.
At face value the offer had some appeal… but would it be a long-term performer?
Many developers are very good at providing you with that glossy brochure selling you the lifestyle and the boutique location, but is there actually a demand in the area? If there’s a leaseback deal that comes with the property, what are the costs and what is the time frame? Do you also need to furnish the property and at what cost?
In this particular deal there was a leaseback agreement for five years at 4.9 per cent yield on purchase price and according to the brochure council rates are $2,000 per annum and owners’ corporation costs come in at $26 per week or $1,352 per annum.
Let’s crunch the numbers using this information (and assuming that the deposit is used from an equity release, 37 per cent tax rate and 5 per cent interest rate at interest only), the deal may be slightly cashflow after tax for the first three years. It then would revert to slightly negative at year three due to the depreciation on the property decreasing.
If we then look at the deal with a principal and interest loan, the out of pocket expenses each week could be in the vicinity of $150 in the first year with it blowing out to $230 per week by the tenth year — again due to the decrease in depreciation.
Now let’s consider what would happen if you had to rent the property out on the open market, or that the golf club did not take up the leaseback — what would your situation then look like?
Connecting with local property managers, the market rental appraisal for this property would be around $460 to $480 per week. So, taking a weekly rental amount of $470 per week the property with an interest only loan is slightly negative from year one at around $1,600, but if you had to pay principal and interest from day one, you would be paying a huge $10,300 per year from the first year increasing up to almost $13,500 in year ten.
The other consideration has to do with the new depreciation laws; if you were the second or subsequent owner of the property you would not be able to claim the depreciation on the Chattels and the holding cost would be larger again.
For the mentoring team the two biggest considerations with a property of this type are:
In closing, our advice would be to see past the lifestyle aspect and to ensure, as always, that the numbers work for your life, your goals and your ultimate wealth creation.