Group 24 USB143 assignment one 2022

docx

School

Queensland University of Technology *

*We aren’t endorsed by this school

Course

143

Subject

Finance

Date

May 25, 2024

Type

docx

Pages

Uploaded by ChefIceApe32

Group 24 Created by a group of 3 Section 1 was done by Joshua Corbin Section 2 was done by Oliver Mirosch Section 3 and 5 was done by Bailey Gadd USB143 ASSIGNMENT SEMESTER ONE 2022 Word Count: 1818 words.

Section 1 – By Josh Corbin The client has provided a $400,000 budget in which they would like to buy a property in which they would like to invest in. After looking at some listings through numerous real estate listings a $500,000 townhouse could be an ideal property for the client. A property in Waterford with three bedrooms, two bathrooms, and a two-car garage is an ideal property for many home buyers. With current property prices rising by up to 29.3% in the last year many people are exploring the option of moving to outlying suburbs to find affordable living (Yardney, 2022). When buying any property support from the bank is a preferred option for many home buyers. In the case of this client banks generally lend 80% of the purchase price depending on financial situations. Therefore, if the client pays $100,000 of their own money and the bank pays the additional $400,000, the client can pay back the bank overtime. Although, when buying properties there are numerous legal costs.  Legal and conveyancing fees= $500-$1300  Pest and building inspection= $350  Stamp duty= $0 (First home buyer) - $8750  Mortgage registration= $197  Transfer fees= $1381  Loan application fee= $197  Lenders mortgage insurance= $0 (20% deposit paid)  Council rates= $500/quarter Therefore, the total cost of legal fees for first home buyers is $11,425 whereas, for non- first home buyers it costs $20,115 (Insignia Homes, 2021). Therefore, assuming the client isn’t a first home buyer as they are looking for an investment property instead of a home to live in, they would have to pay the full $20,115 leaving the client with $279,885. As the property is an investment property the property would then have to go back on the market as a rental. In the suburb of Waterford, the average rental price for a townhouse with three bedrooms, and two bathrooms is approximately $370/week. However, once again there are fees involved when renting out a property which includes advertising, condition reports, letting fees, monthly administration fees, and lease renewal fees. Depending on your agent prices can vary, although the average management fee is 16% per week (Independent Property Group , 2022). This means that management will take $59.2 per week leaving the client $310.8 per week in rental income. With time the market will fall and rise, however, there is a steady rise meaning that there is an opportunity for an increase in rental price to allow the client to have more cash in hand and pay back the mortgage faster. Section 2 - By Oliver Mirosch After-tax Total Return on Investment (dollar terms) Income from investment property = weekly income for property x weeks in a year = $370 x 52 = $19 240 per year  Therefore, before tax, the investment property is yielding $19 240 per year Yearly income (including tax deductions) = yearly income – tax deduction (highest marginal tax rate of 47%) = $ 19 240 x 47%

= $19 240 x 0.47 = $9 042.80  Based upon their yearly income and tax deduction rate, the owner of the investment property can expect a deduction of $9 042.80 in their total income Total yearly taxable income (considering tax deduction) = $19 240 – $9 042.80 = $10 197.20  Therefore, after one year, the owner of the investment property can expect to make $10 197.20 off the property after tax Total income following 6-year investment (considering yearly tax deductions) = $10 197.20 x 6 = $61 183.20  Therefore, following the 6-year investment period, the investment property owner can expect to make $61 183.20 (after tax deductions) off of the property Find compound interest of property = Total Investment return = total income + capital gain from investment ($) – investment expenses = ($61 183.20 + $709 259) – $500 000 = $770 442.20 – $500 000 = $270 442.20  Therefore, the total investment return the investment property owner can expect to make following the 6 year investment period is $270 442. 20 After Tax Return on the investment (%) = total investment return / investment expenses = $270 442.20 / $500 000 = 0.54 x 100 = 54% Return on Capital = Total investment return / own monies invested (expressed as %) = $270 442.20 = $270 442.20 / 100 000 = 2.7045 x 100 = 270.44% Therefore, this investment is quite profitable due to its after-tax return on capital exceeding 100% Overall, this investment shows to be a good one because not only are you making money on it throughout the year from rent but also the property itself price will keep rising over the 6 years. It a long investment to wait on but is a low risk one so the price will most definitely go up. The only problem with this investment is that you will not make money back on it until the house is actual sold, this means someone doing this would have to have a comfortable income due to the fact that they will have a loss of a large some of money for 6 years and only be making very little profit each year until the house is sold. Overall, this shows if you

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Figure 1 Data from ASX are comfortable making this purchase it would be a investment to make as it is low risk and can make a lot of money from it. Section 3 – By Bailey Gadd If the initial $400,000 investment had been spent invested into the Vanguard Australian Shares Index ETF (ASX: VAS). It would be not requiring any money to be borrowed for the investment as the investor views shares as “risky. If the $100,000 that was invested into the home were to be put into Vanguard it would look as follows: As of market close on the 18 th of May 2022, VAS is trading at $91.37 a share (ASX, 2022). The initial investment was for a duration of 6 years. Therefore, to get the best representation of the property investment against the Vanguard investment the same amount of money needs to be invested into both. Therefore if $100,000 worth of Vanguard were to be bought it would equate to 1,094.5 shares. Over the past 5 years VAS quarterly dividend payouts have equated to roughly 81 cents a share per quarter, data from investsmart.com. As the shares are said to be fully franked then no tax will be paid on the dividends. Calculations have been conducted using data from ASX.com, to discover the annual rate of growth for Vanguard over a 5-year period. Figure 1 shows the annual rate of growth for Vanguard, with the average annual rate of growth being 5.28% a year. This estimate considers the black swan event of covid so a more conservative estimate may provide a better look at the return of the potential investment. This

means that the average rate of annual growth and average dividend has considered the covid recession. This is better to determine how the $100,000 will create income over the 6-year period calculations are necessary to guess an estimate that is realistic and reliable. Using the following data, the questions can be answered. Dividends: On average dividends are 81 cents a share per quarter Average rate of growth of Vanguard: 5.28% per annum i.) After tax return on investment in dollar terms $100,000(1.0528) ^6 = The total amount of money worth of Vanguard shares at the end of the 6-year investment period. Which is $100,000 (1.0528) ^6 = $136,168.06 Which is a $36,168.06 return from investment But there is the dividend payout. My data told me that VAS pay quarterly dividends which means that over 6-year period dividends are paid out 24 times which means that. 24 x (0.81 x 1,094.5) = $21,277.08 in dividends Therefore, if the dividends aren’t reinvested and they are fully franked that means that over the 6-year investment period the return on investment is  $21,277.08 + $36,168.06 = $57,445.14 Therefore, the after-tax return, with no tax as the dividends are fully franked the total return is $57,445.14 ii.) After tax return on investment as a % (57,445.14 / 100,000) x 100 = 57.45% as a return on investment in a 6-year period iii.) After-tax return on capital % The after-tax return on capital % is the same as ROI % as there was no money borrowed for this to happen Therefore, Return on capital % = 57.45%

VAS share price and company information for ASX:VAS. (2022). Retrieved 20 May 2022, from https://www2.asx.com.au/markets/etp/vas Vanguard Australian Shares Index. (2022). Retrieved 20 May 2022, from https://www.investsmart.com.au/shares/asx-vas/vanguard-australian-shares-index/ dividends Vanguard (2022). Retrieved 20 May 2022, from https://www.vanguard.com.au/personal/en/about-us Section 5 – By Bailey Gadd With all things being considered, the client should choose the property investment as it is considered to be the best for return on investment. The property investment has ROI percentage of 270.44% which is a very good amount. The investment property will also continuously bring in money as well due to the rental payments coming in weekly from the property. The weekly income easily passes the quarterly dividends of the Vanguard investment. The vanguard investment option only had a ROI of 57.45% which is quite small in comparison to the investment property return on investment. Obviously, the Vanguard investment is from data and is only based off of speculative data and scenarios. But even so, the investment does not come close to the return on investment that the investment property has. The change in ROI from the Vanguard investment to the property investment is nearly 5 times bigger. The investment property is sustainable as well as the mortgage repayments are paid off through the rental repayments. The rental investment is a much better option as the client had $400,000 to spend initially so only putting $100,000 means that $300,000 is left to be invested elsewhere. Furthermore, if the loan were to become a problem and the rent was not coming in, then the $300,000 that was spare could help pay off some of the loan and make it easier for the client to take 100% equity of the property. Therefore with everything taken into account the client is advised to invest in the property.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Bibliography Section 3 references VAS share price and company information for ASX:VAS. (2022). Retrieved 20 May 2022, from https://www2.asx.com.au/markets/etp/vas Vanguard Australian Shares Index. (2022). Retrieved 20 May 2022, from https://www.investsmart.com.au/shares/asx-vas/vanguard-australian-shares-index/ dividends Vanguard (2022). Retrieved 20 May 2022, from https://www.vanguard.com.au/personal/en/about-us Section 1 references Yardney, M. (2022). What’s ahead for Brisbane’s property market?. Retrieved 20 May 2022, from https://propertyupdate.com.au/whats-ahead-brisbanes-property-market/ Home buying costs in Qld: the ultimate guide to the hidden extras, and how to save more | Insignia Homes. (2021). Retrieved 20 May 2022, from https://www.insigniahomes.com.au/home- buying-costs-in-qld-the-ultimate-guide-to-the-hidden-extras-and-how-to-save-more/ How much are property management fees?. (2022). Retrieved 20 May 2022, from https://independent.com.au/how-much-are-property-management-fees