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Information - residential property investment calculator

Disclaimer - while the calculator is a comprehensive tool, it is to be used only as a guide; the results do not constitute a recommendation by the Shape of Money as to the success or failure of an investment.

The result of your calculation will be based on a number of assumptions and additional information, both of which are detailed below. We strongly recommend that you take some time to review and understand this information.

It is recommended that you carry out some sensitivity analysis. Use a base set of best guess values or variables, then change the key variables (such as rent, capital growth and inflation rates) to judge the effect of changes to these conditions. For example, watch the effect of soaring interest rates, or plummeting market rentals.

Initial purchase costs

Land and building costs - This cost can be found on your property valuation. If you don't have a valuation, ask your real estate agent for assistance.

Consider this article from property lawyers conveyIT around the GST on your residential property investment transaction.

Depreciation - For the purposes of this calculator, this is based on the opening tax value of buildings only. To calculate the opening tax value for buildings:

• Calculate the purchase price for the land and buildings by deducting the market value of the chattels from the total purchase price,
• Multiply the purchase price for the land and buildings by the building value from your valuation,
• Divide that result by the land and building value from your valuation.

A working example is given in the IR264 "Rental Income".

Chattels cost - This cost may be found on your property valuation. If you don't have a valuation, ask your real estate agent for assistance. Alternatively, make a listing of the chattels and use approximate 2nd hand values. Please see the Inland Revenue's booklet IR264 "Rental Income". For the purposes of this calculator, chattels are depreciated at 10% straight line for tax purposes. Unlike the building, the chattels will wear out. Therefore, the calculator includes an annual payment equivalent to 10% of the value of the original chattels for cash flow purposes. This effectively ensures that the value of the chattels remains the same over the term of the investment.

Legal fees (deductible) - These include expenses incurred in arranging a mortgage and drawing up a tenancy agreement. These expenses are deductible for tax purposes, in this calculator. Please see the Inland Revenue's booklet IR264 "Rental Income" for additional assistance,

Legal fees (non-deductible) - "Legal costs involved in buying or selling a property are not deductible". Please see the Inland Revenue's booklet IR264 "Rental Income" for additional assistance. These costs are added to the cost of the property and capitalised in the calculator.

Valuation and survey fees - These include valuation, survey and building fees. These costs are added to the cost of the property and capitalised in the calculator.

Mortgage details

Amount of loan - Enter the total value of your loan. Note that the total of the land, building and chattels, should equal the amount of your loan, plus your deposit

Mortgage rate - For example, if the rate is 7.5%, enter 7.5.

Term of loan - Use the drop down, or over write as required (maximum term of 20 years).

Payments per year - Use the drop down to choose either fortnightly or monthly repayment frequency.

Type of Loan - Use the drop down to choose either table or interest-only loan-type options.

Ongoing information

Your annual gross income - Enter the approximate total of your gross income, excluding any income from this potential property investment. This value is used to calculate the tax benefits and losses of the potential investment.

Inflation rate - We have entered a default value for inflation, but you can over write this with your own estimate. If your rate is 2.50%, enter 2.50. This value is used to grow several variables on an annual basis, including weekly rent, property management fees, rates, maintenance, insurance and other expenses

Real capital growth rate - This rate is used to grow (or decrease) the value of land, building and chattel costs. If your rate is 3%, please enter 3.0. This is independent of the inflation rate. For example, if you use 3% with a 2% rate of inflation, this is an approximate real growth rate of 1%. ("And when you strip out inflation, the rise over the 40 years is just over one percent per year" - page 72, More Money, Less Debt, Consumer Books)

Weekly rental - This is how much rent per week you expect. If that is $150, please enter 150. This variable is increased each year by the inflation rate above.

Occupancy rate - This is your estimate of how many weeks per year the property will be tenanted. We have entered a default value, which can be over written as required.

Property management fees - If you intend to use a property manager, please enter the estimated annual fees. These expenses are deductible for tax purposes in this calculator. This variable is increased each year by the inflation rate above.

Rates - Please enter the estimated annual rates. These expenses are deductible for tax purposes in this calculator. This variable is increased each year by the inflation rate above.

Maintenance - Please enter the estimated annual maintenance costs. These expenses are deductible for tax purposes in this calculator. This variable is increased each year by the inflation rate above.

Insurance - Please enter the estimated annual insurance premiums. These expenses are deductible for tax purposes in this calculator. This variable is increased each year by the inflation rate above.

Other expenses - Please enter the estimated other taxable expenses involved in this potential investment, vehicle running costs for example. These expenses are deductible for tax purposes in this calculator. This variable is increased each year by the inflation rate above.

Closing investment information

Agent's commission - We have entered a default value for the agent's commission, but you can over write these with your own estimates; if your rate is 2.50%, enter 2.50. These expenses are not deductible for tax purposes in this calculator.

Investment Period - How many years do you intend to hold the investment for? Please choose a period of up to 15 years.

Discount rate - This rate is used to calculate the net present value of the cash flows. It reflects your required return on the investment. If the NPV is greater than zero, then you have achieved your required rate of return. The annual net cash flow is discounted by this rate so that the total NPV of your investment is shown in today's dollars. Please read the information contained in The Basic Valuation Model.

Other information

Tax - For the purposes of this calculator, if the loss is greater than your income, then the tax benefit is zero and the loss is not carried forward.

Depreciation - The building cost is depreciated at 2% straight line for tax purposes in this calculator.

Depreciation Recovered - "When a building is sold for more than its adjusted tax value, the depreciation recovered is taxable income" The amount of depreciation recovered is the lesser of:

• The original cost price of the building, minus the adjusted tax value, or
• The sale price, minus the adjusted tax value.

Real Estate lawyers conveyIT offer some legal guidance around the intention to buy and resulting tax implications.

Refer IR264 "Rental Income" for more information and/or your tax adviser.

Assumptions

• Annual gross income, rent, property management fees, rates, maintenance, insurance and other expenses increase with the nominated rate of inflation.
• Tax payments/refunds are included in the cash flow of the year they occur. In reality, this cash flow would probably occur a number of months after the end of the year.
• For tax purposes, it is assumed that the property is either always rented out or is always available for renting out.
• Land and building costs are increased by the nominated capital growth rates
• The result does not include the cost of your own time.
• No allowance is made for capital improvements.
• Expenses are GST exclusive.
• Income tax calculations ignore ACC costs, such as the earner premium.