Property Development Finance Rahn and Deepa Case Study - Accounting Assignment Help

Assignment Task

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.

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.

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