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Balance Aged Care Specialists

What are the costs for a Retirement Village?

In comparing Retirement Villages from a financial perspective, I like to break it into 3 separate costs;

Ingoing Cost

“Entry Contribution” may also be called the “buy in price” or “purchase price” (but the technical name is an Entry Contribution).

The size of entry contribution will vary depending on the area, & the size of the accommodation purchased. Will vary from a few hundred thousand dollars to over $1M.

Naturally the closer to major cities the land cost is greater, & it will also be driven by whether you purchase a unit or a villa, or an apartment or a free- standing home & how many bedrooms, bathrooms number of garages & the overall size.

The price will tend to reflect the price for similar size accommodation in the local area. However, most retirement Villages, you do NOT own the real estate (there are some exceptions to this) see the section above on tenure.

Ongoing Cost

“Recurrent Charge”, may also be known as the maintenance Fee, monthly charge or management fee. Usually in the hundreds of dollars a fortnight or month.

This is for the cost of contributing towards the ongoing maintenance of the grounds & the buildings & insurances, it may vary depending on whether there is only one person living there or both of you are living in the village, & also relates to the size of the dwelling you purchase

In my mind it is similar in cost to maintaining your own home, & also defrays the cost of the council rates & water rates (especially for leasehold & loan licence villages-here you don’t own the real estate). If you have a strata title unit, then you would receive separate council & water rates & probably also must pay strata fees.

However, for those people who need more assistance, they can elect to pay an assisted living package, whereby you pay extra for meals, cleaning, linen laundry etc. Some villages provide a package that includes everything, some villages offer a price list where you can choose from a menu of services.

Some villages also offer an Assisted Living Apartment, whereby once you reach the stage you need more help & support you can move out of your ILU & move into a smaller dwelling (still in the Retirement Village Grounds) but it usually smaller than the dwelling you purchased initially, it might only be a bed sitter or a one-bedroom apartment.  These are still not aged care, & still come under the rules of Retirement Villages.

Outgoing Costs

“Deferred Management Fee” (or DMF), may also be known as the Departure Fee or Exit Fee.

This is where most Retirement Villages make their money. It will be expressed in several different ways.

Usually the DMF will be expressed as a percentage of the entry contribution, or as a percentage of the sale price. You should check carefully what the DMF rate is, & how it is calculated, & don’t assume that they are all the same (see below for examples of different DMF’s). The DMF frequently has a maximum that is reached after a certain number of years.

It is frequent that departing from a Retirement Village will result in getting less back than you paid for your entry contribution in the first place, therefore buying a Retirement Village is NOT an investment, you should see it as buying a lifestyle (because that is how it is being marketed in the first place).

As well as the DMF, the contract may allow for the following;

  • Commission (for the village to sell the unit on your behalf
  • Refurbishment Fee (to renew the unit for the next buyer)
  • Share of capital Gain– this may sound better, however you need to check how the DMF calculations works. Often a village will offer a share of the capital gain, but charge the DMF on the sale price (which would be higher than the purchase price). This may work better for you, but it may also be worse.

Some village operators are now offering differential pricing, ie they will provide choices, whereby you might pay a smaller upfront entry contribution, but pay a larger DMF (meaning you get back less of your initial investment, OR they could charge a higher upfront entry contribution & you pay a smaller DMF (meaning you get back more of your initial investment. This may make a substantial difference to your pension entitlement or your ability to afford a unit. This is where you may need assistance from us in helping to see which option is better for you.


Examples of Deferred Management Fees (DMF)

Case Study 1

Entry Contribution – $600,000
DMF – 10% immediately then 2.5%pa to a maximum of 30% (ie 8 years)
Based on – Entry Contribution (no share of capital Gain)

Case Study 2

Entry Contribution – $600,000
DMF – 5%pa to max of 30% (ie 6 years)
Based on – Entry Contribution (no share of capital Gain)

Case Study 3

Entry Contribution – $600,000
DMF – 5%pa to max of 30% (ie 6 years)
Based on – Sale price (50% share of capital Gain), Commission 3%, Refurbishment fee $5,500

If we assume that time has passed since these ILU’s were purchased & that the unit is now being sold for $1M, how much would you get back in each case, after 5 years or 10 years.

 

RateLess other costsReceived after 5 yearsReceived after 10 years
Case Study 110%, then 2.5%Nil$425,000$380,000
Case Study 25%paNil$450,000$420,000
Case Study 35% x $1M x 5 years = $250,00050% share of capital gain, 3% Commission, Refurb fee$515,000$465,000

But you should also consider what would it be if you only lived in the village for 1 year, then case study 1, would probably be far worse for you, than # 2 or #3

What about differential pricing?

There are some Retirement Villages that are trying to make it more affordable & be able to match the needs of potential clients, by providing choices in how you pay for your ILU.

Case Study 1

Arthur (75) single, looking to sell his $1M home & purchase an ILU (independent Living Unit) & has found a village which has the following choices for the same unit. Arthur already has $20,000 in the bank

Option 1 – $600,000 Entry Contribution, DMF 30%
Option 2 – $400,000 Entry Contribution, DMF 50%

Option 1Option 2
Purchase price$600,000$400,000
Bank (after purchase)$420,000$620,000
Pension entitlement$10,620paNil
Interest on $420K @ 2.5%pa$10,500pa$15,500pa
Total Income$21,120pa$15,500pa
Refundable after 10 years$420,000$200,000
Other assets$420,000$620,000
Total assets$840,000$820,000

Therefore, if Arthur chose Option 1 he would have less money in the bank, but more Age Pension, & more money to live on, & would have slightly more assets in the future.

However, if he chose Option 2, he has more money in the bank, & would get no Age Pension at all, & would have $5,620 less income to live on (ie $100pw less). Therefore, he might need to draw down on his savings & if that is the case in the future he would have less in assets. BUT this may suit his purposes, it might be that he had a mortgage on his home, it might be he needed or wanted to give his children money. It all gets down to your individual circumstances.

Case Study 2

Cheryl 78 (single) is looking at the same unit as Arthur, but her home is only worth $550,000, & we assume that she only has $20,000 in the bank.

Option 1 – $600,000 Entry Contribution, DMF 30%
Option 2 – $400,000 Entry Contribution, DMF 50%

Option 1Option 2
Purchase priceCan’t be done$400,000
Bank (after purchase)$170,000
Pension entitlement$23,995pa
Interest on $420K @ 2.5%pa$4,250pa
Total Income $28,245pa
Refundable after 10 years$200,000
Other assets$170,000
Total assets $370,000

If Cheryl wanted this unit, due to the fact this Village provided differential pricing, she was able to go ahead with option #2, otherwise she would have to find somewhere else, because Option #1, would not have worked.

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