Investing in a House and Land Package: A Two-Year Cash Flow & Tax Forecast
Are you considering a new house and land package investment? This guide offers a detailed two-year forecast of cash flow and tax impacts based on a $720,000 investment, a 12‐month build period, and a rental income of $610 per week.
1. Key Assumptions
- Land Registration: May 2025
- Construction Duration: 12 months (completion by May 2026)
- Start of Rental Income: June 2026
- Purchase Price: $720,000 (comprising $324,000 for land and $396,000 for construction)
- Loan Details: 80% LVR totaling $576,000 (interest-only)
- Interest Rate: 6.01%
-
Depreciation (Year 1):
- Capital Works: $396,000 × 2.5% = $9,900
- Plant & Equipment: Approximately $6,000
- Total Depreciation: $15,900
- Expected Rent: $610 per week (equating to about $31,720 per year)
- Other Annual Costs: Council rates, insurance, management fees, etc., totaling $7,802
2. Year 1: The Construction Phase
During the build period, no rental income is received. Based on drawdowns, an estimated average loan balance of $288,000 at 6.01% interest results in an interest cost of approximately $17,293. Other expenses remain minimal until the construction is complete.
3. Year 2: The First Full Rental Year
Income and Expenses Overview
| Item | Amount |
|---|---|
| Rental Income | $31,720 |
| Loan Interest | $34,176 |
| Other Expenses | $7,802 |
| Total Costs | $41,978 |
The pre-tax cash flow is calculated as $31,720 (income) minus $41,978 (expenses) which results in a negative cash flow of $10,258.
Depreciation and Tax Impact
With total depreciation of $15,900, the taxable rental loss becomes:
–$10,258 + $15,900 = –$26,158.
Assuming a tax rate of 34.5%, the tax saving is approximately $9,032, reducing the net holding cost to about $1,226 per year (roughly $24 per week).
4. Summary
| Metric | Value |
|---|---|
| Annual Rent | $31,720 |
| Total Annual Expenses | $41,978 |
| Depreciation | $15,900 |
| Taxable Rental Loss | –$26,158 |
| Estimated Tax Refund | $9,032 |
| Net Holding Cost (After Tax) | $1,226 per year |
5. Key Takeaways
- Year 1: Anticipate interest-only payments of approximately $17,293 with no rental income until the property is ready.
- Year 2: Depreciation significantly reduces overall holding costs, lowering them to just about $24 per week.
-
Strategic Considerations:
- Engage a professional to prepare a depreciation schedule once construction is complete.
- Verify rental projections with a local property manager.
- Keep track of the construction timeline for more precise budgeting.
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