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 $420,000

Interest rate 6%

Maturity No more than 5 years

Interest payment Per month

Get loan of construction $2555,712

Interest rate 6%

Maturity No more than 2 years

Interest payment 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 400,000

Tax bracket 0.45

Investment Cost Calculation

Land cost (36 Inverness Street) 600,000

Fully finance by bank at rate of 6% per annum

Settlement days 120 days

Construction cost (apartment building: 21 studios and 14 tw0-bedrooms -3194,640

Other relevant cost (including all permits and demolition cost) -100,000

Estimated total cost -3894,640

Loan

Land loan (70%) -420,000

Construction loan (80%) -2555,712

Total loan -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 100000

presaleof 3 two-bedroom apartment 84000

NPV of payment received from presale of 5 studio 849057

NPV of payment received from presale of 3 two-bedroom apartment 713208

NPV of selling 16 studio after built-up 3018868

NPV of selling 11 two-bedroom apartment after built-up 2905660

NPV of selling 23 car parking lot 216981

NPV of Interest payment -168437

NPV of tax return on interest payment 50531

Total Income 7769868

NPV of Loan Principal Payment -2807275

NPV 4962593

IRR 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 Tax on this income Effective tax rate

0-$18,200 Nil 0%

$18,201-$37,000 19c for each $1 over $18,200 0-9.7%

$37,001-$80,000 $3,572 plus 32.5c for each $1 over $37,000 9.7-21.9%

$80,001-$180,000 $17,547 plus 37c for each $1 over $80,000 21.9-30.3%

180,001 and over $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) Mortgages

s 14 – CK must be in writing and signed s 42 – prohibits mortgage by deposit of

deeds/title – needs to be in writing and signed

by mortgagor

s 15 – oral CKs only if complies with

regulations

s 44 – Mortgage must identify property

s 16 – pre-contractual disclosure which

ensures that before entering into CK must

disclose matters in s17

ss 45– 47 prevents or restricts mortgages over

certain property such as future property

s 17 – matters to be included in CK

include credit provider‟s name, amount of

credit, interest rate, fees and charges

s 49 – mortgage void to extent it secures more

than debt owed

s 19 – CK cannot be later altered by credit

provider without debtor‟s written consent

s 50 – List of prohibited securities

s 20 – copy of CK must be provided to

debtor

s 51 – Mortgagor cannot assign property

without morgagee‟s consent

s 21 – Debtor can terminate CK before

credit used (subject to fees and charges)

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 2349m

2.

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 three-

storeys-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 51m

2 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 3-

level 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 Cash Flow

Interest: -$178,543 Interest -$178,543

Other Expense -$181,072 Other Expense -$181,072

Profit/Loss -$278,543 Construction Cost -$3,194,640

Land Cost -$600,000

Income $400,000 Selling Income $8,350,000

Loss -$278,543 Tax Savings $177,114

Taxable Income $121,457 Net profit per annum $4,453,931

Tax Payable $32,886 Net profit per week $85,652

Original Tax Payable $210,000

Tax Payable after

deduction

$32,886

Tax Savings $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