Download Investment Plan: Build a Three-Storeys

Investment Plan: Build a Three-Storeys-Apartment on a Vacate Land
36 Inverness Streee, South Clayton
李沁臻(Finance)
陈初豪(Law)
邓建明(Building and Development)
蔡高翔(Marketing)
熊夏韵(Accounting)
1.0 Finance
1.1 General Background and Finance Plan
Investment is a process to earn more money from existing money and property.
Although investment always has risk, many people could still make big profits if plan the
investment plan wisely. Investing in real property is one of the good ways.
The client, Mr. Chan, is going to buy a land of 890M2, priced at $600000, in Clayton
South. As a chief executive manager with annual salary of more than $400000, he is able
to get 70% of the land cost paid by bank loan. After get the land, the settlement period for
the contract is 120 days and during this period, the legal procedure is settled down, with
permits of building apartment buildings and the architecture plan, the presale of building
can start. According to law, with more than 20% of the units sold on presale, the building
can get loan for 80% of its costs. The plan is to get the loan and build a three-floor
apartment building with 21 studios, 14 two-bedroom apartments with 23 car park lot in the
first floor. After built up, sell these units directly to the market.
Loan Plan (from ANZ):
Get loan of land
Interest rate
Maturity
Interest payment
$420,000
6%
No more than 5 years
Per month
Get loan of construction
Interest rate
Maturity
Interest payment
$2555,712
6%
No more than 2 years
Per month
1.2 Investment Flow:
With the presale of 5 studios and 3 two-bedroom apartment, the clients get 10%
of the selling price of the units, which is $184000. Than after the apartment is built up,
the other 90% will be paid. The building is predicted to be finished in one year. The
NPV of the rest selling income on presale is $1562265. After the building is built up,
it is expected that the rooms and parking lots are sold out soon. The NPV of the
selling income is $6141509. As the interests are paid monthly, the NPV of the total
interest for that year is $168437 with a tax return of $50531. After selling the building,
the bank loan will be paid. The NPV of the future payment on bank loan is $2807275.
After that, the NPV of the project can be calculated as $4962593 and the internal rate
of return is 496%.
Background Information
Personal income per annum
Tax bracket
400,000
0.45
Investment Cost Calculation
Land cost (36 Inverness Street)
Fully finance by bank at rate of 6% per annum
Settlement days
Construction cost (apartment building: 21 studios and 14 tw0-bedrooms
Other relevant cost (including all permits and demolition cost)
Estimated total cost
600,000
120 days
-3194,640
-100,000
-3894,640
Loan
Land loan (70%)
Construction loan (80%)
Total loan
-420,000
-2555,712
-2975,712
Interest and Tax Influence
Annual interest payment with interest 6%
Tax return on interest payments at 45%
House Selling Profitability Calculation
presale of 5 studio
presaleof 3 two-bedroom apartment
NPV of payment received from presale of 5 studio
NPV of payment received from presale of 3 two-bedroom apartment
NPV of selling 16 studio after built-up
NPV of selling 11 two-bedroom apartment after built-up
NPV of selling 23 car parking lot
NPV of Interest payment
NPV of tax return on interest payment
Total Income
NPV of Loan Principal Payment
NPV
IRR
100000
84000
849057
713208
3018868
2905660
216981
-168437
50531
7769868
-2807275
4962593
496%
2.0 Law
There are several legal issues has to be dealt or be taken care of throughout the whole
process of this investment, including the processes of calculating personal income for tax
payable and receivable, mortgage, conveyancing of the land, designing and building up the
apartment and sale of apartment. This part of the proposal will figure out all the possible legal
issues and to ensure the legal interests of the investor; this could help the investor to avoid the
possibility of breaching any legislation or regulation as well.
2.1 Tax
As mentioned before, Mr. Chan is a professional and famous dentist in Melbourne.
His personal income is around $400,000 per annual. There are many forms of taxation in
Australia in Australia. For the discussion of this context, we will only touch on personal
income tax which is the most relevant one to the investment plan.
Income taxes are the most significant form of taxation in Australia. Personal income
taxes are imposed at the federal level, thus they are collected by federal government
through the Australian Taxation Office (ATO). The state governments do not impose
income taxes, and have not done so since since World War II due to the judgment of
Uniform Tax Case 1942.
Income tax on personal income is a progressive tax. The current tax-free threshold is
$18,200, and the highest marginal rate for individuals is 45%. As with many other
countries, income tax is withheld from wages and salaries in Australia, often resulting in
refunds payable to taxpayers. A nine-digit Tax File Number (TFN) must be quoted to
employers for employees to have withholdings calculated using the various tax brackets.
The table below shows the individual income taxes rates for Australian residents for
financial year 2012-13:
Taxable income
0-$18,200
$18,201-$37,000
$37,001-$80,000
$80,001-$180,000
180,001 and over
Tax on this income
Effective tax rate
Nil
0%
19c for each $1 over $18,200
0-9.7%
$3,572 plus 32.5c for each $1 over $37,000
9.7-21.9%
$17,547 plus 37c for each $1 over $80,000
21.9-30.3%
$54,547 plus 45c for each $1 over $180,000
30.3-less than 45%
Source: Rate and Calculators. ATO. 1 July 2012.
Clearly, Mr. Chan with annual income of $400,000 falls under the last categories of
the personal income bracket and his effective tax rate is 30.3-45%. The details of his the
calculation of the tax payable and receivable and the tax saving has been discussion in the
accounting section above.
2.2 Mortgage
As we have discussed in the finance part of this proposal, we advice Mr. Chan to get
loans from the bank to buy the land (36 Inverness Street, Clayton South, it will be called
the land hereafter) for investment purpose. In this sense, mortgage loan is involved in this
process. The land is a Torrens System land.
A mortgage is one way by which a purchaser of land can finance the purchase. A
mortgage is a loan secured by real property. In this process, the bank is called mortgagee
and Mr. Chan is mortgagor.
Under the Torrens system, the mortgagee does not become the legal owner, but
acquires a registered interest, while the mortgagor remains the legal owner ( or registered
proprietor, to use the terminology of the Torrens System). When the mortgage is lodged
and registered (s 74(2) Transfer of Land Act 1958 (TLA hereafter)), the mortgagee
acquires a registered interest in the form of a statutory charge. When the debt repaid, the
mortgagor has a statotury right to call for a discharge.
As Mr. Chan (the mortgagor) is a natural person (see ss 3-6) and the mortgage secures
obligations under a credit contract, National Credit Code (Sch 1 to the National Consumer
Credit Protection Act 2009) applies in this case. The National Credit Code (NCC hereafter)
contains provisions relating to certain type of mortgages over real and personal property.
In this case, Mr. Chan gets the credit from the mortgage over a real property (the land)
under a credit contract.
There are several issues that Mr. Chan has to take care of to ensure the mortgage is a
legally recognized one and his interests in the mortgage be ensured. The table below
shows the key provision for mortgage in NCC which purports the interests of both
mortgagor and mortgagee:
Credit Contracts (CK hereafter)
s 14 – CK must be in writing and signed
s 15 – oral CKs only if complies with
regulations
s 16 – pre-contractual disclosure which
ensures that before entering into CK must
disclose matters in s17
s 17 – matters to be included in CK
include credit provider‟s name, amount of
credit, interest rate, fees and charges
s 19 – CK cannot be later altered by credit
provider without debtor‟s written consent
s 20 – copy of CK must be provided to
debtor
s 21 – Debtor can terminate CK before
credit used (subject to fees and charges)
Mortgages
s 42 – prohibits mortgage by deposit of
deeds/title – needs to be in writing and signed
by mortgagor
s 44 – Mortgage must identify property
ss 45– 47 prevents or restricts mortgages over
certain property such as future property
s 49 – mortgage void to extent it secures more
than debt owed
s 50 – List of prohibited securities
s 51 – Mortgagor cannot assign property
without morgagee‟s consent
2.3 Conveyance
Once we get the loans from bank, we have money to buy the land and we have to
consider the legal issues of conveyance of the land. The law imposes formal requirement
for the transfer of title. Legal title passes on registration of an instrument of transfer. There
is almost invariably a time laps ( eg 30,60 or 90 days) between the time of a contract of
sale is made and the time when the executed transfer is delivered to the purchaser on
payment of the balance of the purchase monies (i.e. „settlement‟). The formal requirements
are set out in s 126 Instruments Act 1958.
S 52(1) of Property Law Act 1958 (PLA) states that all conveyances of land should be
made by deed for general law land. A deed is a legal instrument in writing which passes,
or affirms or confirms something which passes, an interest, right or property and that is
signed. However, in case, the land is of Torrens System Land. For Torrens System land,
registration takes the place of a deed (refer to ss 40(1) and 40(2)) of TLA)
2.4 Permit
Once Mr. Chan managed to register the land under his name, then Mr. Chan should
seek for building licence to build the apartment on the land. A building permit is a
document that proves that a registered building surveyor has inspected and approved plans
and documentation before a project begins. These all are regulated by the Building Act
1993 and Building Regulation 2006. The Building Act 1993 prescribes a penalty of
$10,000 for work undertaken without a permit. Building permits provide standards for the
construction and maintenance of buildings and ensure the safety of the people who use
them.
As there is a new building (a three-storeys-apartment) on the vacate land, we have to
get an occupancy permit. An occupancy permit is a certificate that local council or a
registered building surveyor is satisfied with the works and building as being suitable to
occupy from a health and safety perspective. The Building Act 1993 requires the issue of
an occupancy permit prior to occupation of a new building. It is an offence to occupy a
new home that does not have an occupancy permit.
An occupancy permit can be issued when items affecting health and safety are in
place and capable of being operational. These include water supply, sanitary and cooking
facilities, smoke alarms, safety glass, handrails and balustrades.
Mr. Chan may request certificates or statements from various practitioners involved
in the construction of the building to confirm that the building is suitable for occupation.
Certificates may be required from the electrician and plumber for example, to show that
power is connected and the smoke alarms are operational or that water, sewer and
stormwater have been connected.
2.5 Sale of the Apartments to Public
Once the three-storeys-apartment has completed, Mr. Chan can be the vendor of the
units and start to sell the studios and two-bed-rooms-apartment. Mr. Chan has to prepare
vendor‟s statement to the purchasers.
A Section 32 Statement also known as a vendor‟s statement is a statement given by a
vendor to a purchaser who is interested in purchasing a property. The name “Section 32
Statement” originates from s 32 of the Sale of Land Act 1962 (Vic). This section requires a
vendor to provide certain information to a purchaser before the purchaser signs the
Contract of Sale. If a vendor fails to provide a signed Section 32 Statement before the
purchase signs the Contract of Sale, the purchaser may be able to rescind the Contract.
The Section 32 Statement should be prepared by a conveyance or solicitor. If a vendor
knowingly or recklessly provides false information or fails to provide all of the
information required by s 32, then it would be a criminal offence and can be fined. Basic
information in the s 32 includes:
 Statutory warnings to the purchaser
 Vendor‟s details
 Title details
 Particulars of owner-builder warranty insurance
 Written inspection report
 Particulars of any mortgages or “charges” over the land
 Information regarding covenants, easements and any other restrictions on title
 Planning information, particularly where zoning restricts land use
 Information regarding outgoings payable by the owner of the property
 Disclosure of any notice or orders issued by the authorities, regarding fencing,
road-widening, sewerage etc
 Access to the property by road
 Information on services connected to the property
Mr. Chan also has to make sure that there is a 3 day of “cooling-off” period that
required in s 31 of Sale of Land Act. And there is “passing or risk” in s 34 of that protect
the purchaser. The purchaser can rescind from the contract where dwelling house
destroyed or damaged so as to be unfit for occupation.
3.0 Building and Development
A huge parcel of vacant land approximately 890m2 with wide frontage of almost 20m by
44.5m of its length, which shown in Figure 4, that located in 36 Inverness Street Clayton
South. However, 2m from each side and 1m at the back would not be used for building
purpose because it should have left gaps between nearby houses and apartment, the vacant
area would be used for planting instead. As a result, the gross floor area would finally
become 43.5m by 18m that equals to 783m2 and shown in Figure 4 as well.
Figure 4 Size of Land
3.1
Layout of the apartment
Site design and building form refer to the arrangement of buildings, space and landscape
within a site and a careful consideration of building scale and form, movement patterns, and
external spaces have been involved. The guideline of the Department of Sustainability and
Environment states that, one of the most significant issues of residential developments is
safety. Due to the fact that the area around the apartment is a living area, thus building an
apartment would probably maximize the visibility and surveillance of the public environment.
According to Monash City Council the maximum building height should not exceed 9m, as a
consequence the dimension of the apartment is designed to be 43.5m  18m  9m. The layout
is presented in Figure 5 below. The building is simply built as a rectangular shape with
carrying 3 floors which are ground floor for car parking purpose, whereas first floor is studio
type and second floor is 2-bedroom type for living purpose. Stairs, 2m  1m, are provided to
connect through the whole building from ground to second floor which is built on the left of
the front door inside the building. The height of ground, first and second floor is 4m, 2.5m
and 2.5m respectively. Consequently, the usable area comes to 783m2  3 which is 2349m2.
Figure 5 3 Dimension of the Apartment Layout
3.2
Floor Plane of the Ground Floor
The purpose of ground floor is car parking and the floor plan is shown below in Figure 6. The
dimension of the car park is 43.5m  18m as same as the width by length of the building. 23
parking spaces including 2 parking spaces for people with disabilities have been built. All the
dimensions of parking spaces and the 2-way driveway have already been met the minimum
requirements of Australian Standards 2890.5. The driveway within the car park is 6m width
for 2 ways whilst the dimension of parking space is 5.5m  3.5m. Additionally, it is well
considered the disabled parking spaces are to be built next to the lobby of the apartment due
to convenience and its dimension is 6.5m  4m which satisfies the Australia Standards 2890.1.
Figure 6 Floor Plan of Ground Floor
3.3
Floor Plane of the First Floor
On the first floor, 14 two-bedroom rooms have been constructed. Nevertheless, the length of
each room is not alike the car park‟s length since a 43.5m  1m covered porch has been
manufactured out of the rooms. The floor plan of the first floor is drawn in Figure 7 below.
The size of each room is exactly the same that is 17m  3m comes to 51m2 in total. The floor
plan of each room will be presented in Section 2.5.
Figure 7 Floor Plan of First Floor
3.4
Floor Plane of the Second Floor
As for the second floor, it is also for living purpose as same as the first floor. Therefore, the
design of both floors is mostly similar as well. The covered porch with 43.5m  1m is placed
the same location, the only difference is all living units are built as studio type. Given that
only one person will be living in each unit, so the size of each room is a little bit smaller than
2-bedroom type. The dimension of each room is 17m  2m equivalent to 34m2. 21 units are
possibly able to be built on this floor. The floor plan of the second floor is drawn in Figure 8
below. The floor plan of each room will be presented in Section 2.6 below.
Figure 8 Floor Plan of Second Floor
3.5
Floor Plane of 2-Bedroom
In each 17m  3m bedroom, all necessary rooms have been provided including laundry room,
bathroom, living room, 2 bedrooms and kitchen. The size of two bedrooms is different and
apparently bedroom 1 is about double of bedroom 2, it can be seen in Figure 9 the floor plan
of 2-Bedroom.
Figure 9. Floor Plane of 2-Bedroom
3.6
Floor Plane of Studio
It is a simple, yet effectively used studio design. Its dimension is 17m  2m equals 34m2.
Floor plan is shown in Figure 10. Without walls separating the bedroom and living room, the
active area in the studio would definitely increase. Furthermore, by mixing the laundry and
bathroom together, tenants are able to enjoy a larger and also more comfortable bathing place
to relax.
Figure 10. Floor Plane of Studio
4.0 Marketing
According to the experience of investment we had, the first step is researching.
According to the figure from Australian Bureau of Statistics, Melbourne has 4,169,103
populations which ranked 2nd biggest in Australia. And, Real Estate Institute of Victoria
provides the information that the value of both houses and apartment are increasing (refer to
figure 1 in Appendix). Therefore, we get a conclusion that Melbourne is a good place for
investment.
After long time of comparison in different suburbs, a vacate land in South Clayton is
targeted. The address is 36 Inverness Street Clayton South. We propose to build a threestoreys-apartment on the vacate land. There will be 23 car parks and 2 disabled car parks, 21
studios with approximately 34m2for each them, 14 two bedrooms apartments with 51m2 each,
and one public laundry. The reason this land is investable because of two perspectives.
1. For future investors‟ perspectives:
a) Price. According to the REX property analysis, the suburb‟s house price is cheapest
comparing to other historical period. Also, REX property analysis provides that the
houses in this suburb are selling well. In other words, the houses or departments in
the suburb are popular; the number of sell is increasing (refer to Figure 2 in
Appendix).
b) Rate of return. The sale of a studio is $199,999 and a two-bed-room apartment is
$279,999. After the accountant carefully calculates, every studio will bring 7.68%
annual return to investor, and two-bedroom apartment will bring 6.77% annual return
to investor.
c) Reality. As an investor who really concern about whether the plan could be
executived. This plan is not like some plan which is no access at all, it entirely can be
done from purchasing land to build and finally deal with customers at considerable
price.
2. From tenants‟ perspectives:
a) Criminal rate. According to Maslow‟s need hierarchy, safe is the second important
thing in people‟s life. Of course, protect themselves is the nature of the human being.
Clayton South is part of Kingston Local Government Area (LGA. The charts below
show the comparison of crime statistics between Kingston and Victoria (refer to
Figure 3 in Appendix). And the conclusion is, Kingston has much better than most of
other suburbs in Victoria.
b)
Location. "In certain locations, close to the city or around universities, they
can be a good investment," this opinion is provided by SQM‟s Christopher. Other
facilities around the apartment decide the popularity of that. There are two parks just
nearby, these are good place to walk and relax after dinner. There is also a hospital
named Monash Medical Centre, the distance is approximately 2.5km. Moreover, it is
also very convenience for Monash university students who from this apartment to
Monash university only takes 4.5 kilometers.
The studios and two-bed-room-apartments will be sold different methods. Advertising
through television, radio and newspaper are definitely will be used. There are few methods
can be used to attract new customers and increase the interest of them.
① Provide an offer that we will number 1 to 23 for different parking area, anyone
who comes first, he/she will have right to choose first.
② We will provide stamp duty free for people who book or buy apartment/ studio
before we finally build up. Therefore, pre-purchaser only need to pay 10% of
total price, comparing to 20% of post-purchase, purchase in advance will be
more worthy.
③ Price adjustment set an attractive price. For example, a studio sells at $199 ,999
and an apartment sells at $279.999.
④ Set up a stage and put into few experience investors (know- how investment
employee) , provide free investment experience explain, also can mention the
price of houses/ apartments in Melbourne, how worth to purchase one of this
apartments.
Then selling accesses:
1. Post relevant information and contact number in the internet or with brochure.
2. Auction: After building up, find an agency, tell them all information and benefits
about this apartment and sell the apartment for each or many at same time.
5.0 Accounting and tax
Personal income and tax policy (tax subsidies, deduction and return) also affects personal
financial decisions. Income tax is the single largest expense in a household. Managing taxes
is not a question of if you will pay taxes, government gives many incentives in the form of
tax reductions and credits, in terms of property investment, and it would be most likely
depreciation, loss of rent and differences of income and expenses, which we call negative
gearing. It is a form of leveraged speculation in which investor borrows money to buy an
asset, but the income generated by that asset does not cover the interest on the loan.
Australian taxation system allows deduction of ongoing investment losses against highly
taxed income which offers investor a better way to manage daily cash flow.
To avoid the mortgage insurance, the calculation below would be based on 80% finance.
Personal Income: $400,000 -------- Taxable Income: $400,000; Tax payable: $210,000
Construction cost: Land Price: $600,000
Building cost: According to the offering list the builder sent us, for the 3level walk-up unit complex, concrete structure and ground floor parking buildings, they
charge $1700 per square meter in a medium constructing speed. However, we get 20%
discount since the builder is a friend of investor. Therefore, the building cost would be $1,700
* (783 * 3) * 0.8 = $3,194,640
Interest Rate:6% ----- current major bank‟s variable interest rate
Loan: We have applied 70% for land and 80% for building.
Estimated Market Price: $280,000-----2 bedrooms as current market price
$200,000----- studio as current market price
$10,000------parking as current market price
Looking at the above figure, as Australian property value doubles every 7-10 years, return is
calculated as below:
Book Profit
Interest:
Other Expense
Profit/Loss
-$178,543
-$181,072
-$278,543
Income
Loss
Taxable Income
Tax Payable
$400,000
-$278,543
$121,457
$32,886
Original Tax Payable
Tax Payable after
deduction
Tax Savings
$210,000
$32,886
Cash Flow
Interest
Other Expense
Construction Cost
Land Cost
Selling Income
Tax Savings
Net profit per annum
Net profit per week
-$178,543
-$181,072
-$3,194,640
-$600,000
$8,350,000
$177,114
$4,453,931
$85,652
$177,114
Yearly cash flow yield for 1 year: $4,453,931 (* $85,652 profit per week)
Total Profit: $4,453,931
Initial Input: $1,000,000
Return: 3,453,931
Average Yearly Profit: $3,453,931
6.0 Conclusion
In short, this is a good investment. The return of this investment is 496%. The marketing and
legal issues has been solved.
Appendix:
Figure 1
Figure 2
Figure 3