Reference no: EM132359016

Assignment -

Case studies provide complex problem-solving opportunities to real-world challenges by exploring current issues in the relevant field of study.

The case study assessment builds on scenario-based learning throughout the unit and encourages the development of reasoning, problem-solving and decision-making skills. This allows students to learn by doing, as a final step before applying knowledge in professional practice.

Details: Find an Australian house or apartment that you would like to research. From here on this will be referred to as a house or property or home regardless of whether it is a house or apartment. The house can be anywhere in Australia so long as you can find enough details about the home and the other variables discussed in the below questions.

You are to undertake an evaluation of the selected property that assesses the financial feasibility of its purchase and subsequent use as a rental property (tenanted, Airbnb or otherwise). Your primary objective is to create as high a return as possible.

Report:

1) Executive summary (150 words)

Summarise the whole report including purchase choice, rationale and evaluation in a succinct manner.

2) Introduction (100 words)

Outline the purpose of the report and how using finance theory will assist you in the decision making.

3) Property description (200 words)

State the house's full address and important details such as the price, number of bedrooms and bathrooms, floor space and any other aspects that you think are important. Include a small picture.

4) Rationale for purchase and rental (400 words)

Estimate the home's value based on an average of similar properties that have sold recently. Using a table, set out the details of the other properties and why you think that they're comparable. Outline the major rationale for choosing the property using statistics and macroeconomic data. Explain the environment, market and comparable properties. Explain your strategy for rental including sourcing tenants, market rents and advertising, as well as your rationale for your source of finance.

5) Financial feasibility (350 words and template)

Using a word or excel template (examples will be provided or you may use those from the course or develop one of your own), estimate the gross annual rental revenue from leasing the property, the annual rental costs including all fee's, repairs, advertising and financing/mortgage expenses. Estimate the annual growth rate of rents and costs in order to estimate cashflows over a 10 year period. Determine the sale value at this point and show the NPV, IRR, ARR and payback period using the template. Explain and reference all your calculations and assumptions, for instance mortgage interest calculations and state any formulas that you use. You must explain what the calculations mean and how they impact your decision.

6) Overall conclusions and recommendations (300 words)

Justify your purchase using the financial feasibility and rationale that you have selected. Summarise and explain the risks associated with the decision proposed and how you may mitigate against them.

7) References

Provide a reference list that shows all sources of information. You are expected to use a minimum of 10 sources of information.

Assignment Template -

Find an Australian house or apartment that you would like to research. From here on this will be referred to as a house or property or home regardless of whether it is a house or apartment. The house can be anywhere in Australia so long as you can find enough details about the home and the other variables discussed in the below questions.

Question 1 -

Question 1a: State the house's full address and important details such as the number of bedrooms and bathrooms, floor space and any other aspects that you think are important. Include a small picture.

Question 1b: Estimate the home's value based on an average of no more than 3 similar properties that have sold within the last 2 years.. Using a table, set out the details of the other properties and why you think that they're comparable. The table should have at least 5 columns including the addresses, number of bedrooms, floor space, last sale date and price. You can include other columns too if you think they're important. The first row of the table should include the details of the property you're valuing which was stated in Question 1, and the other rows (include a minimum of one other property to compare) should show the details of the other similar properties.

Question 1c: Estimate the gross annual rental revenue from leasing this home if you were the landlord and chose to rent it out to another person. You should find similar rental properties and take an average of their actual or advertised rents. A table similar to the one used above might be appropriate. The gross rental revenue ignores costs of renting. Ignore the intra-year time value of money effect. So for example, even though rent might actually be $3,000 paid monthly, assume that it is 36,000 (=12 * 3,000) paid annually at the end of the year. Reference your sources.

Question 1d: Estimate the annual rental costs of leasing your home asset if you were the landlord and chose to rent it out to another person. Ignore financing costs such as interest expense because we wish to value the home asset, not the homeowner's wealth or 'equity' in the home. Similarly to the above, ignore the intra-year time value of money effect. Be sure to present your figures using a table. Reference your sources.

Question 1e: Estimate the annual growth rate of rents. Provide arguments as to what the annual growth rate of rents should be. Reference your sources which may include data from the Australian Bureau of Statistics (ABS) or the Reserve Bank of Australia (RBA).

Question 1f: Assuming that your property lasts forever, use the 'perpetuity with growth' formula to find the implied total required return of the house asset (Rhouse) based on the estimated house price (Price), net rent (NetRent) and rental growth (Ghouse). Note that net rent equals gross rental revenue less rental costs.

Question 2: Find the best (lowest rate) Australian home loan comparison rate (Rloan) that you can. Quote your source, the date it was observed and the important information about the loan such as its maturity, how often payments must be made (usually monthly), whether it's variable or fixed interest and interest-only or fully amortising.

Question 3: Would you expect the required return on the house (Rhouse) to be higher or lower than the Australian home loan comparison interest rate (Rloan)? Explain your answer. Comment on whether you think your house is over-priced, under-priced or fairly priced.

Question 4: Find the current longest-term Australian risk free yield (Rgovt) that you can, assuming that it's the long term Australian government bond yield. Quote your source and the date it was observed and the important information about the bond such as its maturity, how often coupons are paid, whether it's variable or fixed coupon and the coupon rate.

Question 5: Would you expect the Australian home loan comparison interest rate (Rloan) to be higher or lower than the long term Australian government bond yield (Rgovt)? Explain your answer. Comment on whether you think your home loan debt asset is more or less risky than the Australian government bond from the lender's perspective. Remember that the investor in a home loan asset is the bank, and the investor in the government bond asset is the bond buyer, who could be a person, a super fund, or a bank among others.

Question 6:

Question 6a: Calculate the price-earnings ratio (price / earnings) of your house? Ignore interest expense and taxes. Assume that the house's earnings are its net rent.

Question 6b: Find the price-earnings ratio (price / earnings) of a particular Australian listed share that you like, such as Commonwealth Bank (But do not pick CBA, pick some other share):

Include a screenshot of your source, perhaps from the Google Finance source linked above.

Question 6c: The price-earnings (PE) ratio is most similar to what 'capital budgeting' measure that we've studied? NPV, IRR, ARR or payback period? Explain why.

Question 6d: Judging by the price-earnings ratio, which investment is better, the house or the share that you picked? Explain.

Question 7: Describe how 'negative gearing' works. Use references. Bonus marks for illustrating an example of how it works using your house investment above.

Attachment:- Assignment Files.rar