Firstly to include a client's investment property/ies you will need to capture the total value of the investment properties in the “investment properties total value”
Capture any income received from the investment property in the “Household income”
Option 1 - Selling a property in the event of a cash shortfall
To manage the sell-down of the investment properties you can do this using the allocation strategies, where you can set a “Reduce Shortfall / Fund Retirement Allocation Strategy”
Here you can use the reduce shortfall allocation strategy to cover any shortfalls at the end of each period.
The allocations you wish to utilise should be enabled via their toggle and can be re-ordered by dragging and dropping them into the right spot.
It's important to note that the Investment Property allocation can only be specified in percentage terms representing the number of investment properties held, i.e. 100% = 1 property, 50% = 2 properties, 33.34% = 3 properties, 25% = 4 properties. This is so the engine can sell down one investment property at a time, calculating the after-tax return. There are two key assumptions - debt against the properties is presumed to be evenly split and the investment property is assumed to have been held for over 12 months.
Allocation strategies follow the flow in which they have been set and specified. To visualise this, picture a waterfall. For a reduced shortfall allocation strategy. Any shortfall in income required will come from the top bucket (or allocation) set. Once this bucket or cashflow is exhausted it will continue to draw down from each allocation strategy to meet the income requirements.
In the example below, the investment property will only be sold once the funds from 1-4 have been exhausted.
At this point in time, there will be a positive cash flow movement.
This will be represented in the projection chart and report at the point the property has sold.
To see this in action watch here:
Option 2 - Specifying the timing of the sale
Should you wish to time the sell down of the investment property this can be managed using the “Household cash flows” table to manipulate the figures for the timing of cash flows.
It would be suggested to create a new scenario to work in to minimise any impact to your original base case scenario and demonstrate the change in best life score for your client.
Firstly ensure you turn off the sell-down strategy for the investment property.
Next make your way to the Household cash flow table. There will be three inputs that need to be adjusted from the specific year you want to model the sale from:
- Sale proceeds to be entered as an additional contribution
- Household income to be reduced to cater for the loss of rental income
- Income spent to be reduced to cater for the reduction in spending to maintain the investment property
Enter the sale proceeds of the investment property in the Household cash flows table as an Additional contribution on the year of the sale.
Next you will need to reduce the Household income to remove any rental income as this will cease at the time of the sale. To do this enter 0 ( or the residual amount of household income) and carry this forward for their remaining life expectancy by dragging the line item down.
Now adjust the income spent to reduce the spending by the dollar cost to maintain the property as this will no longer be applicable. In this example we have reduce the spendings by $5k each year moving forward.
Run the projection to pull through the new data into the projection.
To review the impact access the projection chart and report.
Within the projection chart you can see the increase in total cash between year 2036-2037 at the tim of the sale of the investment property (900k Additional contribution plus amendments to income and spending).
You may notice that both the investment property asset and associated loan are still in the report. This will not impact on the Best Life score as the score is impacted by the cahs flow engine. As the cashflows have already be catered for via the additional contribution, income and spending levers the score has already been adjusted.
To see this in action watch here: