Legal Description: Flat1, 2, 3 & 4 DP 53199 Having 1/4 share in 1227 m2 being Lot 2 DP 34697 with ROW over LOT 1 DP 34697
Tenure: Fee Simple crosslease - 1/4 share
Area: 1227 m2
Quality of Rental Investment: The quality of rental investment of the chosen propert, among all available option, is best and location is also comparatively the best location among all oprtion according to the financial analysis of the properties; the net present value, internal rate of return, expenses, and the future aspects of the propert value.
Assuming no inflation (i. e. the property is to be sold at current capital value and no rental or cost change), does this investment meet your client's investment objectives
Considering that there is no inflation and property is to be sold at current capital value and no rental or cost change, this investment is meeting client investment objective.
The investment objective of client is to earn minimum pre-tax return of 7% on his investment. IRR is rate where NPV (the present value of future cash inflows and outflows) would be zero. The thumb rule for IRR is that when cost of capital is lower than calculate IRR, project should be taken in consider since it is use a hurdle rate for companies.
Require rate of return is 7% while IRR is 36.74% which is favoring this investment.
Net Present Value
7%
$1,020,266
Internal Rate of Return
36.74%
Make the following assumptions:
Rents increase at 4% annually
Net Present Value
7%
$1,033,047
Internal Rate of Return
37.34%
Costs increase at 2.5% annually
Net Present Value
7%
$1,019,111
Internal Rate of Return
36.62%
Property values increase by 5% compounded every year.
Net Present Value
7%
$991,031
Internal Rate of Return
35.23%
Considering the assumptions made in (2) above, what would be the return on the investment with 100% equity (i.e. no borrowings) respectively with and without an assumed 33% of the investor's marginal income tax rate (i. e. pre & post tax)?
Net Present Value
7%
$1,020,266
Internal Rate of Return
36.74%
See excel for further working
References
Abelson, P. (1993), Housing in Australia: Prices, Costs and Policies, Australian Planner, December, pp. 79-85.
Allen, M.T., Springer, T.M. and Waller, N.G. (1995), Implicit Pricing across Residential Rental Submarkets, Journal of Real Estate Finance & Economics, Vol. 11 (2), September, pp. 137-51.
Anderson, H.S. (1998), Motives for investments in housing rehabilitation among private landlords under rent control, Housing ...