Group 24 USB143 assignment one 2022
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Queensland University of Technology *
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143
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Finance
Date
May 25, 2024
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docx
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7
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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
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