A friend has just emailed you about an apartment that she is considering purchasing. It is a one bedroom apartment for $1,000,000 that rents out for $575 per week. An interest only loan could be obtained for 80% of the price at a rate of 3.2% per annum. Strata levies are $2380 per quarter. Council rates are $350 per quarter and the only other bill is $250 per quarter for water. She plans to keep it as an investment property.

1. What is the yield on this investment if your friend buys the property using a 20% deposit and includes the stamp duty of $40,643 as part of the investment? If the stamp duty is added to the mortgage then what is the yield? What happens to the yield if the mortgage interest rate goes to 5% and the charged rent drops by $50 per week? Is this the typical level of yield commensurate with the risk level? Please provide some comparable yields in other financial instrument classes. (5 marks; 250 word limit and 50% deduction of marks if over 250 words)

2. Does renting it out and not living in it provide a better financial position in Australia if you consider the tax system? Ensure you identify any assumptions in your answer. If the apartment is newly built, what are the additional risks to be considered? If your friend decided to pay with cash instead of requiring a mortgage, what would be the effective yield?