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Executive Summary

This report shows an analysis of property investments. It contains the findings, conclusion, and recommendations in relation to a commercial showroom comprising three separate units located on the southern fringe of the Sydney CBD. Various capital investment techniques such as Net Present Value (NPV), Internal Rate of Return (IRR), and Profitability Index (PI) have been used in this report. The DCF analysis presented in this report shows the expected returns and risks associated with the property. It also includes an analysis of the market, financial and property specific risks. Nine property ratios have also been made part of this report.

Introduction

Property investment analysis is important to make decisions regarding the investment in real estate properties. The two best variables to be considered for such analysis are value appreciation and cash flows. Cash flow here refers to the net balance of cash after making all the payments, and appreciation is the equity earned due to increase in the value of property overtime (Fields, 2022). A number of variables are used for analyzing the residential rental property such as property details, purchase information, financing details, income, and expenses related to such property.

Assuming the revenue stream can be adapted to expansion and land costs increment with expansion, then, at that point, value land speculations might give an expansion support. Obligation financial backers in land hope to accept their return from guaranteed incomes and regularly partake in no appreciation in worth of the basic land. Along these lines, obligation interests in land are like other fixed-pay speculations, like bonds. No matter what the type of land speculation, the worth of the hidden land property can influence the presentation of the venture with area being a basic figure deciding the worth of a land property. Land property has a few remarkable qualities contrasted and other speculation resource classes. These attributes incorporate heterogeneity and fixed area, high unit esteem, the board seriousness, high exchange costs, devaluation, aversion to the credit market, illiquidity, and trouble of significant worth and cost assurance. There are various sorts of land properties in which to contribute. The fundamental business (pay delivering) land property types are office, modern and stockroom, retail, and multifamily. Different sorts of business properties commonly are characterized by their particular use.

Findings

1. Wale

With regards to land and property speculation, Grain represents Weighted Normal Rent Expiry. It is a monetary measurement utilized by land financial backers and investigators to survey the gamble and soundness of rental pay from an arrangement of rented properties. Grain is determined by taking the normal rent term for every one of the leases in a property portfolio, weighted by how much rental pay each rent produces.

The equation for working out Rib is as per the following:

Grain = Σ (Rent Term * Rental Pay from Rent)/Complete Rental Pay

In this formula:

"Rent Term" is the leftover time until the lapse of each rent.

"Rental Pay from Rent" is the yearly rental pay created from each rent.

"Absolute Rental Pay" is the amount of yearly rental pay from all leases in the portfolio.

2. Discounted Cash Flow Model

INCOME

0

1

2

3

4

5

Potential Gross Income

$2,04,750

$2,09,869

$2,15,115

$2,23,720

$2,32,669

Vacancy allowance

$10,238

$10,493

$10,756

$11,186

$11,633

Gross income after vacancy

$1,94,513

$1,99,375

$2,04,360

$2,12,534

$2,21,035

EXPENSES

Outgoings

Operating expenses

$38,903

$39,875

$40,872

$42,507

$44,207

Statutory charges - Council

$10,000

$10,000

$10,000

$10,000

$10,000

- Water rates

$6,000

$6,000

$6,000

$6,000

$6,000

Landlord insurance

Total outgoing expenses

$54,903

$55,875

$56,872

$58,507

$60,207

Net operating income

$1,39,610

$1,43,500

$1,47,488

$1,54,027

$1,60,828

Other expenses

Capital outlay

-$30,62,000.00

Stamp duty on purchase

-$85,000.00

Legals on purchase

-$3,000.00

Loan repayments

$22,02,900

$3,15,000

$3,15,000

$3,15,000

$3,15,000

$3,15,000

Loan fee

$960

$960

$960

$960

$960

Debt repayment

$3,15,960

$3,15,960

$3,15,960

$3,15,960

$3,15,960

Sale of property income

$35,63,936

Net cash flow pre tax

-$9,47,100.00

-$1,76,350.00

-$1,72,459.75

-$1,68,472.24

-$1,61,932.73

$34,08,804

Net cash flow pre tax

-$9,47,100.00

-$1,76,350.00

-$1,72,459.75

-$1,68,472.24

-$1,61,932.73

$34,08,804

NPV

$9,52,760.16

IRR

19.60%

PI

2.0060

DCR

NOI/payments

0.442

0.454

0.467

0.487

0.509

Net operating income 

$1,39,610

$1,43,500

$1,47,488

$1,54,027

$1,60,828

building allowance

$13,750

$13,750

$13,750

$13,750

$13,750

Plant depreciation

-$5,000

-$5,000

-$5,000

-$5,000

-$2,500

Loan fee

-$960

-$960

-$960

-$960

-$960

Interest on loan

-$1,35,253

-$1,21,078

-$1,06,903

-$92,728

-$78,553

Capital gain on sale of property

$3,88,186

Taxable income

$12,147

$30,212

$48,375

$69,089

$4,80,751

Tax payable

-$3,340

-$8,308

-$13,303

-$19,000

-$1,32,207

Equity cashflow after tax

-$9,47,100.00

$8,806

$21,904

$35,072

$50,090

$3,48,545

NPV

-$5,97,885.73

IRR

-14.39%

PI

0.37

Net income

$8,806

$21,904

$35,072

$50,090

$3,48,545

building allowance

$13,750

$13,750

$13,750

$13,750

$13,750

plant depreciation

-$5,000

-$5,000

-$5,000

-$5,000

-$2,500

Taxable income from sale of land

$3,88,186

Taxable income

-$9,47,100.00

$17,556

$30,654

$43,822

$58,840

$7,47,980

Tax payable

-$4,828

-$8,430

-$12,051

-$16,181

-$2,05,695

Cash flow from sale of land

$35,36,936

Property cash flow

-$9,47,100.00

$12,728

$22,224

$31,771

$42,659

$40,79,222

NPV

$21,14,149.81

IRR

35.29%

PI

3.23

A Limited Income (DCF) model is a monetary valuation strategy used to gauge the worth of a venture or business in view of its normal future incomes. It is generally utilized in finance, especially for esteeming stocks, bonds, land, and organizations. The center idea driving a DCF model is that the worth of cash today is worth more than a similar measure of cash from now on, because of the time worth of cash.

3. Constant Payment Mortgage (CPM)

A steady installment contract, otherwise called a fixed-rate contract, is a kind of home credit wherein the borrower makes customary, equivalent installments over the existence of the credit. These installments regularly comprise of both head and intrigue and stay consistent all through the whole advance term. The most widely recognized term lengths for consistent installment contracts are 15, 20, or 30 years.

The vital highlights of a steady installment contract include:

Fixed Loan fee: The financing cost on the home loan stays consistent for the whole advance term. This furnishes borrowers with consistency and solidness in their regularly scheduled installments.

Equivalent Regularly scheduled Installments: Borrowers make equivalent regularly scheduled installments over the lifetime of the advance. These installments are intended to take care of both the interest and a part of the head with every portion. In the early years, a bigger part of the installment goes toward interest, and as the credit advances, a greater amount of the installment is applied to the head.

Amortization: The credit is organized so the borrower slowly settles the chief equilibrium over the long run, prompting a decrease in the general advance sum.

Unsurprising Planning: Consistent installment contracts are well known on the grounds that they make it more straightforward for borrowers to financial plan and plan for their lodging costs. Since the regularly scheduled installments are fixed, property holders can guess what their home loan installment will be every month, which can give monetary dependability.

No Curve balls: With a proper loan cost, borrowers are shielded from increasing financing costs, which can happen with movable rate contracts (ARMs). This solidness can be favorable in an increasing loan cost climate.

While consistent installment contracts offer strength and consistency, the compromise is that the underlying financing costs for these home loans are commonly higher than the underlying rates for customizable rate contracts. Borrowers need to painstakingly consider what is happening and long-haul objectives while picking between various home loan choices.

4. Property Ratios

Ratio

Calculation

Year 1 

Breakeven Ratio

(Expenses + Debt service)

(54,903 + 315,960)

=

1.81

Gross Income (fully let)

$2,04,750

Debt Coverage Ratio

Net Rental Income

$1,94,513

=

0.62

Mortgage payments

$3,15,000

Debt Coverage Ratio

After tax Rental Income

194,513*(1-0.275)

=

0.78

(After Tax)

Debt service - untaxed interest

315,960 - 135,253

Expenses Ratio

Operating Expenses

$1,39,610

=

0.68

Gross Income (fully let)

$2,04,750

Running Yield

Net Rental Income

$1,94,513

=

6.2%

Purchase Price

$31,50,000

Loan to Value Ratio

Outstanding Loan

$22,02,900

=

70%

Estimated Property Value

$31,50,000

Equity Return 

Cash Flow before tax

-$1,76,350

=

-18.66%

(Before Tax)

Initial Equity

$9,45,000

Equity Return

Cash flow after tax

$8,806

=

0.93%

(After Tax)

Initial Equity

$9,45,000

Tax Sheltered Yield

(Cash flow - Taxable Income)

=-$176,350 + $12,147

=

-19.95%

Initial Equity

$9,45,000

Conclusion

Based on the tables shown in the above part, it is concluded that equity cash flow pre-tax NPV is positive, pre-tax IRR is more than the discount rate, and pre-tax PI is greater than 1, hence the company can choose to invest in this property if the cash flow before tax is to be considered. The situation is contrary if the cash flow after tax is used. On observing the property cash flow after tax, it is found that NPV, IRR, and PI are even higher than those in case of cash flow pre-tax. The ratios have indicated that equity return before tax is negative while equity return after tax is positive which means the repayment of principal amount of the loan has a major impact on the cash flows. 

Recommendations

The company should rely more on equity rather than debt as the latter is causing an increase in expenses and hence negative NPV. The calculations have shown that major portion of the operating income is would be used in making payment of interest on loan.

Reference List

Fields, C. (2022, April 25). Introduction to Real Estate Investment Analysis. Triproppros https://www.tripropertypros.com/post/introduction-to-real-estate-investment-analysis#:~:text=There%20are%20several%20primary%20factors

Appendices

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