Breaking the Mold: The Expat Family Who Didn’t Invest in Australian Real Estate
28 April, 2023
John and Lucy, both expats living in Singapore, had managed to save 500,000 AUD over the last 10 years.
They both understood that the eroding effects of inflation would cause the value of their savings to depreciate over time and as a result knew that they needed to invest their savings immediately.
Question: Should John and Lucy use their 500k AUD as a deposit on a new 1-million-dollar property in Australia or invest their 500k AUD in the stock market?
John, being a numbers guy, decided that it was best for him to do some financial projections before making their decision. After doing some financial projections they both decided to invest in the stock market. Johns financial projections are presented below.
Disclaimer: The calculations below should not be considered financial advice of any kind. Please consult your professional adviser before making any investment decision. Any content on this site relating to tax matters is for general information only, may not be up to date, and should not be considered tax advice of any kind.
Australian Property Projections
Purchase Price $1,000,000
Initial deposit $500,000
Stamp Duty and Lawyer Fees (W.A State) $50,000
Loan Amount $500,000
Int Rate 5.5% p.a $27,500
Rental Income (Average of 3% on value) $30,000
Term of ownership 10 years
Projected Sale Price (10 years at 6% p.a) $1,820,000
Agent Fees on sale price (Average of 3%) $54,600
Considerations:
- For the purpose of this calculation, we have assumed that the rental income from the property is equal to the ongoing expenses of the property. Interest Payments, Land Tax, Agent Fees, Upkeep and other costs.
- The 10 year average national growth rate for Australian Residential Property is 6% p.a.
- John and Lucy lived in Singapore for the entire 10 years of ownership and as such do not qualify for the 50% Capital Gains Tax discount.
Estimated Gross Profit before Tax: $720,400
Calculation: (Sale Price) $1,820,000 – (Deposit Amount) $500,000 – (Loan Repayment) $500,000 – (Stamp Duty) $45,000 – (Agent Fees) $54,600 = $720,400
Estimated Capital Gains Tax: $304,380
2023 Tax Rate Calculation = $61,200 plus 45 cents on every dollar over $180,000
Capital Gains Tax Payable: $61,200 + (720,400 – 180,000) 0.45% = $304,380
Total Estimated Net Profit: $416,020
Calculation: (Estimated Profit before tax) $720,400 less (Capital Gains Tax) $304,380 = $416,020
Summary: John and Lucy estimated that they could achieve a total return of 83% and grow their initial 500k deposit into $916,020 over the next 10 years if they invested in Australian Property.
Share Portfolio Projections
Initial Investment $500,000 AUD
Initial Entry Fee Nil
Sale/Exit Fee Nil
Estimated Growth Rate S&P 500 10% p.a (The average 10 year growth rate on the S&P 500 index is 11% p.a).
Term of Investment 10 years
Projected Sale Price $1,350,000
Tax Payable Nil (There is nil Capital Gains and Dividend Income Tax in Singapore)
Considerations:
- For the purpose of this calculation, we will assume that the average management fees of 1% p.a will be equal to the dividend payments received by the stock portfolio.
- The 10 year average growth rate for the S&P 500 is 11% p.a. We have used 10% p.a.
- John and Lucy lived in Singapore for the entire 10 years of ownership and as such do not pay Capital Gains Tax or dividend income tax.
Total Estimated Net Profit: $850,000
Calculation: (Sale Price) $1,350,000 – (Initial Investment) $500,000 = $850,000
Summary: John and Lucy estimated that they could achieve a total return of 170% and grow their initial 500k deposit to $1,350,000 over the next 10 years if they invested in the share market.
Conclusion: John and Lucy’s financial projections estimated that they would both make an additional $433,980 AUD over the next 10 years if they invested their $500k AUD in the stock market rather than investing it in an Australian Property. John and Lucy decided to trust the math and proceeded to invest in the stock market.
Key Point:
It is important to note that everyones purpose and intention to invest in Aus-Property can differ and that not everyones situation is the same. Some investors may be returning home in 2 years, some may have lived in their property for some time and other may want to invest for lifestyle reasons and not capital gains purposes. John and Lucy both wanted to invest for Capital Gains purposes. They did not plan on using the property for lifestyle or income purposes, it was purely an investment decision.
It is important to define the purpose of the property before the purchase before making any decision. Is it for Capital Gain, Income or Lifestyle? Once you know the reason for the purchase then do what most people don’t, take the time to calculate the financial projections of the property and then weigh it up against any alternative investment options. Ask yourself: What will be my return on investment after stamp duty, agent fees, land tax, strata fees, insurance, interest payments and Capital Gains Tax if we assume a growth rate of 6% p.a over the next 10 years?
Things are not as as simple as they once were and Australian property may not be the answer it once was.
Book a complimentary video or face to face consultation with Award Winning Expat Financial Advisor Sean Abreu at IPP Financial Advisers for further information.
Nothing on this website should be considered financial advice of any kind. Please consult your professional adviser before making any investment decision. Any content on this site relating to tax matters is for general information only, may not be up to date, and should not be considered tax advice of any kind.
