Property Valuation and Financial Analysis

This assignment examines the financial viability of a property investment. It involves calculating key metrics like Net Assets, Settlement Position, Gross Yield, Net Yield, and Debt/Equity Ratio to assess the suitability of the lender. The assignment also discusses various valuation methods, including Registered Valuation, Sales Comparison Approach, and Depreciated Replacement Cost.

MORTGAGE ADVISER
TASK – 1(a)
EXAMPLE-3: EXISTING INVESTMENT LOAN
In this complex example, the purpose is to take into consideration factors involved in
lending for an investment property. Here, the lender requires to conduct more analysis
and in case the investing entity already holds multiple rental properties, it becomes
essential for the lending adviser to get accustomed with the strategies employed by the
borrower and key ratios which can be obtained from the investor’s Portfolio Investment
Plan. The key factors which will help the lending adviser to draw conclusions about the
investor are – Capital Structure, Loan Type, Interest Structure and the Lender. The
guiding principle underlined by the government in the budget document must match the
products in the investor’s property portfolio strategy after the application of the
Quantitative Analysis in order to meet the declared outcomes in the said strategy.
Qualitative Analysis
In the cited example, four residential properties owned by the investor are managed by a
company. The properties have been rented out to tenants on fixed rental rates. This
matches the investor’s strategy to offer one year fixed term tenancies. I am aware that
the company’s existing investment strategy is still applicable and provides for:
 A Net Yield of 6 %. (the investor applies this prior to selecting a property)
 Debt Coverage Ratio of 1.5 times. (over all investment properties)
 Debt to Equity Ratio of 2.0 times. (over all investments)
The investor applies the following when selecting a loan product:
 The lender most likely is to remain the same, as is for the existing lending.
 Debt level will always be as per the prescribed debt/equity ratio.
 LVR for all lending must be around 67%.
 Interest rate will remain fixed during the fixed term rental contract period.
 All loan terms must be as per the company’s interest cover strategy and must
include an interest only period, if required.
 The loan shall be in the name of the company owning the property and its
directors will provide personal guarantees.

TASK – 1(b)
Mortgage Interest
If money is borrowed for financing a rental property, all interest charges on the
borrowed money can be claimed.
Depreciation
The borrower can claim depreciation on chattels, such as drapes, carpets, stove and
white ware at depreciation rates set by the IRD. Any items rented along with the
property can also be depreciated.
Operating Expenses
All kinds of operating expenses are allowed as deductions, for sole owners, joint tenants
and investment companies.
Capital Improvements
Major improvements made to the property, which change the structure of the property
are to be capitalised by sole owners, joint tenants and investment companies.
TASK – 1(c)
Individual (Sole Ownership)
An individual or individuals borrow as “Natural persons” and are legally treated as
consumers, hence legal protection is given to them under consumer laws.
Tenants in Common
When two or more people jointly purchase a property they are termed as “Tenants In
Common”. In case of death of a joint tenant, their share passes on to their estate.
Partnerships
Partnerships are termed as owners of the property like individuals. Since a partnership
has no legal identity, the liability (both as borrower and mortgagor) is that of the
partners, both jointly and severally.
Company (Limited Liability)
A Company, incorporated under the Companies Act of 1993 with a Constitution is
treated as an ‘Individual’ and has similar borrowing powers as it is considered as an
independent legal entity after its incorporation.
Trusts
A trust is a legal entity in which the "settlor(s)" place their assets under the control of
the "trustees" on behalf of the "beneficiaries". Although all assets are termed to be
owned by the trustees, they only hold the assets on trust on behalf of the beneficiaries.

TASK – 2(a)
1. Portfolio of Evidence
The Fact Find documents are often made part of the loan application form submitted to
the lender and may include other details, such as:
 Personal details, such as age, occupation, earnings etc.
 An Income and Expenditure Statement
 Assets and Liabilities Statement
 Value and details of the security offered
 Calculation of the loan amount
 Structure of the required loan
2. Complete & Submit
(i) The Loan Application
When a lender decides to grant a loan for a residential property, the process for loan
application starts with collection of personal information and financial data of the
borrower (known as Fact Find).

(ii) Authority & Declaration
The Loan Application Form concludes with an “Authority and Declaration” form,
which is required to be signed by all the borrowers. This form:
 covers the required declaration from and by the borrower(s) to the Lender and is
part of the lending application under the Privacy Act Declarations
 gives authorisation to the Lender for obtaining information about the
borrower(s) from other sources including credit reports
(iii) Diary Note
This forms an integral part of the loan application and provides the loan assessor a clear
understanding of the borrower and the proposed borrowing amounts. It includes:
 Details of the borrower (personal names, company, trust etc.)
 Details about the property’s ownership and security details.
 Requested Lending amount (including details of how it is arrived at)
 Source of Deposit
 Loan purpose
 Borrower’s characteristics
 Breakdown of Income Sources
 Final Recommendation with at least three supporting reasons
(iv) Cover Sheet
The following details are to be appended by the Adviser with the loan application in the
“Cover Sheet”:
 Name of the party submitting the loan application form with adviser’s phone
number / fax / mobile / email id and postal address.
 Whether the loan application is urgent or routine.
 Category of application: Pre approval / Under Contract / Finance / Refinance /
Top up.
3. Evidence of following
(i) Income
Income is to be assessed from the Statement of Income.
(ii) Identity
This can be assessed from the Fact Find Document.
(iii) Finance Date
This can be obtained from the Contract Document.
(iv) Settlement Date

This can be obtained from the Letter of Sanction.
(v) Solicitor Details
This can be obtained from the Contract Document.
(vi) Advice Disclosure Statement
This can be obtained from the Application Form.
4. Purpose of following Documents
(i) Evidence of Financial History
This helps the lender in evaluating the borrowing capacity of the applicant.
(ii) Registered Valuation
This helps the lender in evaluating the amount which it can safely give as loan.
(iii) Sale & Purchase Agreement
This helps the lender in assessing the actual ownership status of the borrower.
(iv) Proof of Residency
This helps in establishing the authenticity of resident status of the borrower.
5. Calculations
(i) LVR
LVR is the Loan to Valuation ratio of the property, which in this case scenario comes to
= $484,000 / $689,000
= 70.25%
(ii) DSR
Debt Service Ratio shows proportion of borrower’s capital to the mortgage debt and in
this case scenario = $656,980 / $484,000 = 1.36
(iii) UMI
(iv) Statement of Position
Net Assets = Current Assets – Current Liabilities
= $656,980 - $484,000 = $172,980
(v) Settlement Position
Purchase Price of the Property – Deposit Paid = $689,000 - $484,000 = $205,000.

TASK – 2(b)(1)
Financial Impact for suitability of the lender through Gross Yield and Net Yield.
Gross Yield
Gross Yield is obtained by dividing the Gross Annual Rental Income with the Value of
the Property.
Gross Annual Rental Income is $35,360 and Value of the Property is $543,500.
Hence, Gross Yield = $35,360 / $543,500 = 6.50%
Net Yield
Net Yield is obtained by dividing the Gross Annual Rental Income less the Gross
Annual Expenses with the Value of the Property.
Gross Annual Rental Income is $35,360 and Gross Annual Expenses are $21,600. Value
of the Property is $543,500.
Hence, Net Yield = ($35,360 - $21,600) / $543,500 = $13,760 / $543,500 = 2.53%
Position of Debt Servicing
Debt / Equity Ratio
This ratio is also known as “leverage” ratio in accounting terms. It shows the investors’
stake in the property in relation to the loan obtained.
Property Value $543,500
Mortgage Debt $378,000
Investor’s Equity Contribution $881,500
Hence, Debt / Equity Ratio = Mortgage Debt / Investor’s Equity Contribution
= $378,000 / $881,500
= 0.43 times.
Statement of Positions (Net Assets)
Net Assets = Current Assets – Current Liabilities
= $881,500 - $378,000
= $503,500

TASK – 2(b)(2)
A precise and more reliable form of valuation is the Registered Valuation which is
prepared by a qualified, registered Valuer. A Registered Valuer is a qualified
professional who calculates the value of a property, including the land and the building,
which are used for sale, purchase, mortgage finance, refinancing and insuring.
1. Sales Comparison Approach
This is a widely used method to establish the “Current Market Value” of a property.
This is done by carrying out a complete inspection, an interior and exterior evaluation
and description of the subjected property. These values are then compared with other
similar properties which were sold recently in the same locality.
2. Depreciated Replacement Cost
In this scenario, cost to replace the buildings is taken into calculation and value of
vacant land is added to this amount. The replacement cost is assessed after allowing for
depreciation, obsolescence or other economic factors.