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Section 3: Case Study 3 — Rahn and Deepa
Singh – Property Development Finance
Background
Rahn and Deepa Singh have been clients of yours since 2005 when you assisted them with a home loan
from ABC Bank to purchase their current owner-occupied home. They have recently paid off their loan from
an inheritance from Deepa’s family.
Their accountant has recommended that they consider undertaking an investment property development
in their own personal names as this could assist with reducing tax through negative gearing. While they
wish to explore this option, they do not currently have a financial planner and have said that they have
been considering whether they need one to help them with wealth creation strategies, as they want to
retire within the next 10-15 years. They also wish to look at ways to protect their current assets and
income.
Property development opportunity
Rahn advises that they have taken the advice of their accountant and have located a run-down property on
a large block of land in a nearby suburb. They would like to purchase the property with the aim of
constructing three units on separate titles. On completion, two (2) of the units will be rented out while the
third will be sold to reduce debt and provide funds for another similar project.
The two properties they wish to retain are long term investments which they hope to leave to their
two children. Their solicitor has confirmed with council that given the size of the block they should be able
to sub-divide and each unit will have a separate title.
The property is a corner block, and a local real estate agent has stated that the rental returns would be
slightly higher than suburb averages, as the area is made up of much older homes. Capital growth could
also be above average as the suburb is ideally placed for medium density development with schools and
shops nearby. Transport infrastructure is lacking, however, rail links to the area are planned for completion
during the next four (4) years.
They have also been speaking to council and there appears to be no restriction for a subdivision and they
have indicated they will approve the project.
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Details of the property
Purchase price of property is $600,000. They have obtained a builder’s tender for a total of $750,000 for
the construction of the three (3) units. Cost includes all driveways, fencing and landscaping.
They have also completed research and estimate the following project costs:
• demolition and site clearance costs – $40,000 (clearance within two (2) months of purchase)
• subdivision costs of approximately $30,000
• deposits calculated at 25% of purchase price and construction costs (LVR 75%) of approximately
$405,000
• lender fees and government charges of approximately $15,000
• solicitors’ costs $10,000.
The builder has indicated that completion date is in seven (7) months after the clearance of the site.
The clients are willing to increase the mortgage on the family home in order to fund the project costs and
control these payments. However, they would also like to keep debt over the family home to a minimum.
They have mentioned that they would not like to link the family home to the security offered to support
the property development loans through cross-collateralisation.
The real estate agent has estimated that, on the completion, valuation of each property would be $750,000
and rentals should be around $550 per week per unit.
Below is a summary of initial client fact find. Rahn and Deepa have provided the last two years personal tax
returns and last two (2) payslips as proof of income.
Applicant information
| Name | Rahn Singh | Deepa Singh |
| Address | 26 Nowry Road, Yourtown 1234 (since 2005) | |
| Age | 42 years | 39 years |
| Phone | 0409 988 111 | 0146 234 577 |
| Status | Married with 2 children (Saira 13 & Ajun 16) | |
| Financial details | ||
| Gross income | $86,000 | $65,000 |
| Net income | $65,860 | $52,130 |
| Occupation | Truck driver | Store manager |
| Employer | Interstate Trucking Pty Ltd | Cloths Mart |
| Time of employment | 21 years | 11 years |
| Contact numbers | 7900 5478 | 7890 9876 |
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| Assets | ||
| Owner-occupied property valued | $900,000 Property owned in joint names as ‘joint tenants’ No debt |
|
| Cash at Bank | $250,000 | |
| Superannuation | $350,000 | $200,000 |
| Personal insurances within superannuation |
• Death $250,000 • Total and permanent disability $250,000 • Income protection Nil |
• Death $250,000 • Total and permanent disability $250,000 • Income protection Nil |
| Contents | $150,000 | |
| Motor Vehicles | $35,000 | $20,000 |
| Liabilities | ||
| Credit card | Limit $10,000 Outstanding debt — $5,000 |
Limit $5,000 Outstanding debt — $1,000 |
| Monthly general living expenses | $4,200 |
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| Other Information | |
| New property ownership | Accountant has advised the property is to be purchased in joint names as ‘joint tenants’ |
| Wills | Clients do not have wills and this is a concern to them as they would like to leave one unit to each of their children when they pass. They would also like each of the properties be debt free when this happens. |
| Credit history | Each have good credit history with credit scores over 900 |
| Solicitor/conveyancer | Peter Parker, of Parker Partners – Solicitors |
| Financial planner | Clients do not have a financial planner. |
| Accountant | David Crisp of Yourtown Accounting |
| Subdivision | Council approval for subdivision and approval of plans expected within 30 days of settlement |
| Demolition | To be completed 30 days after approval from council |
| Builder | Home builders Builders are licenced and construction to be funded as follows: • 10% deposit (signing of contract on approval from council) • Stage 1 – 10% slab (60 days after signing of contract) • Stage 2 – 20% frame (30 days after slab payment) • Stage 3 – 20% lockup (30 days after frame payment) • Stage 4 – 20% fit out (30 days after lockup payment) • Stage 5 – 20% completion (includes fencing, driveways and landscaping 60 days after fit-out payment) |
| Credit card debts | Assume the minimum monthly repayment is to be calculated at 3% of credit card limit |
| Interest during construction period | Clients would prefer to pay the interest on the loan during construction period |
| Residual debt | Clients have advised that once the unit is sold they will use the sale proceeds and their savings to clear their home equity loan against the family home |
| Broker remuneration | Calculate upfront commission at 0.66% of loan amount and trail at 0.165% which includes GST |
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