How to estimate an affordable property purchase value
When this is useful
These steps are useful if you have a case where your clients want to buy property or home in a particular year, and you would like to estimate the maximum affordable property value and loan repayments.
Steps to follow
In this workaround, you run a scenario where you substitute the property/home with a shares/managed fund. The amount of shares Pathfinder purchases gives you an approximate maximum value for the property purchase, including affordable loan repayments, if required.
Set up your 'Purchase property' scenario
Set up and check your scenario with everything except the property purchase:
Include everything else you'd like to model (e.g. other expenses, super contributions, other new investments, the sale of another property)
Solve, and then check the results to make sure that any excess funds are going to a cash or offset account. For more information about adjusting this, see How to run a 'surplus cash' scenario.
Make a note of the details for purchasing the property
Make sure you are clear on:
In what financial year the property will be purchased
The ownership split
The property acquisition costs. It is easier to assume a percentage of the property price, rather than a dollar value. The Optimo default is 5% of the property purchase price.
If the property will have a loan, then you also need to know:
The maximum LVR of the property
The loan type (e.g. Interest only or P&I)
The loan interest rate
The loan term
Set up a dummy scenario where the property purchase is substituted with shares/managed fund
Copy the 'Purchase property' scenario
At the Cash flows & goals > Review assets & loans step, add a new Shares/managed fund (which will be a stand-in for the property/home):
Name: Shares for Property estimate
Ownership = Same as home/property would have
Profile = High growth (so Pathfinder will want to put as much there as it can)
Start year = same as the purchase year of home/property
Income reinvested = 100%
Loan to value ratio % = Put the same as the LVR for the home. Or leave the default value if there will be no loan
In the Goals section of the shares, enter the fields as follows:
In the 'Goals', for the 'Deposit at least' and 'Deposit no more than' fields, use the series builder (the right-most field) put zero in the first year, then dash in the purchase year of the home (to allow Pathfinder to calculate the deposits in that year), and then zero in all years after the purchase. For more information, see How to allow a value to be optimised in the series builder by using dash. In the screenshot, below, the property purchase is in 2027/28, so zero is entered in the first year, dash is entered in 2027/28 and then zero is entered the year after in 2028/29.
If the property will also have a loan, then add a loan to the shares and fill in:
Loan type: same as property/home
Interest rate: same as property/home
Remaining loan term: same as property/home
Offset account: Same as property/home
Secured by: leave as default (i.e. the shares)
If the property will be an investment, leave as 100, if it will be a home change this field to zero
Repayment options: same as the home/property would have
Check the results
Solve the scenario, then go to the Results > Cash flows & action items step and in the cash flows report:
In the 'Expenditure' section in the year the home will be purchased, note the amount of shares purchased - this is ballpark figure for the property purchase (including acquisition costs)
In the 'Income' section check how much is borrowed to make sure it is what you were expecting
Note the loan repayments - this is a ballpark figure for what the loan repayments will be
Work out the property purchase value and acquisition costs
The amount of shares purchased is equivalent to the total that can be spent on the property and acquisition costs. So, you need to work out just the property value.
e.g. if the amount of shares purchased was $500,000 and you want to assume acquisition costs of 5%. Then the property purchase price is $476,190 (500,000 / 100% + 5%)
Edit your original scenario
Add the home/property to your original scenario and remember to use the same assumptions you used in the dummy scenario:
Enter the property value (after acquisition costs), which you calculated in the previous step
Adjust the reference year to match the purchase year
Enter the acquisition costs based on the value you used in the previous step.
Add the loan (if required).
Solve and check the results in your original scenario
In your results, go to the Results > Cash flows & action items section
Check that the cash flows report does not have red 'Shortfall' lines at the top. If so, it means that the property value is too high, so you'll need to reduce it or double check your inputs. For more see How to investigate and fix cash shortfalls.
Scroll under the table to see the action items for the purchase year. Review the action item for the property purchase
Adjust if required
If you placed restrictions on other assets to force funds going to cash, you can remove them. It will allow Pathfinder to spend any spare cash there if required.
If it is an investment property, you can try incrementally increasing the property value since the property income may allow a higher property value purchase.
You can also decrease the property/home value, if preferred.
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