Determination of the Cash Flow Projections of Two Real Estate Investments

Property Investment
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Introductions
In this task, the two property has been analyzed by using the method of net present value
(NPV) and internal rate of return (IRR). By using the DCF method the present value of
inflow of cash of both the property has been calculated and is used to evaluate the investment
in real estate. This method or technique is applied to determine the estimated cash flow
projections. DCF is This technique considers a discounting rate to compute the intrinsic value
of the cash flows. The properties are located in Sydney.
Findings and Analysis
The key variables of housing in Australia, Sydney, and suburbs are finance availability,
growth rate of population, interest rate, and the factors related to supply and taxation policy
that can impact on the housing prices of the three places. As per the Australian Bureau
statistics (ABS), the population growth rate has been increased by 16.% and the expenditure
on Research and development has been also increased by 5%. Earlier the expenditure amount
was 17438 million dollar. According to ABS the living index of cost has shown an increasing
trend of 8% (Abs.gov.au, 2019). Population growth, construction boom, and growth
opportunities are the key variables that the investor should consider while purchasing any
property in Sydney. The prices of residential property for the quarter march to June 2019 in
Sydney has been decreased by 0.7% (Abs.gov.au, 2019). In 2018, the number of population
was 5.48 million and the growth rate was 2.05% (population.net.au, 2019). Bankstown which
is a suburb of Sydney is a mix of both public and private housing. Around 39% of the people
of Bankstown are living in a rented house and 8.19% reside in public housing (Australian
Analytics, 2019). It has been analyzed that asking price of property 1 is $525000 and
property 2 is $645000 and the current rental price of property 1 is $445/week while that of
the second property is $470/week. Thus it can be seen that the selling price and rental price of
property 2 is higher even though they are both located in the same area. The vacancy rate of
both the property is 6.1%. This rate indicates that units are not performing well. According to
Kulikova et al. (2015, p-401), if the vacancy rate of a unit is high it means that the unit is not
occupied fully. They should be renovated so that they can be occupied. The percentage of
capitalization of the first property is higher than the second property. According to d'Amato
(2015, p-207), a good capitalization rate to select the suitable property is 4%. The
capitalization rate of first property is 3.8% and the rate of property 2 is 3.3%. The investor
will purchase only those properties whose capitalization rate will be higher. The capital
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growth rate of property 2 and property 1 are 3.1%. Capital growth indicates capital
appreciation in the properties. The stamp duty is higher in case of property 2 as compared to
property 1 because of the higher selling price. The legal fees of both properties are $800 so it
will not impact the decision of investor while deciding to buy the property. The terminal
capital rate in case if property 1 is 4.3% and the rate of second one is 3.8%. It means that the
first property will give higher resale value if the property is to be sold at the end of its useful
life.
Conclusions
After examining the property 1 and property 2 by using NPV, it has been concluded that the
present value of inflows of cash I all the five years is higher in property 1. The cash outflows
This means that property 1 will give high earning in comparison to property 2. After applying
the second method that is IRR method it has been noticed that the IRR is -2.19% in property
1 and -4.4% in property 2. So it’s better to follow the NPV method to take decisions as to
which property is to buy. Though the purchasing cost is high in case of second property the
investor should buy property 2 as the NPV is higher in case of property 2.
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References
Abs.gov.au. (2019). Australian Bureau of statistics, Australian government. [online]
Available at: http://www.abs.gov.au/ [Accessed 21 September. 2019].
Australian Analytics. (2019). Suburb profile – Bankstown – Ancestry, income and property
ownership.. [online] Available at: https://securedatapower.com/blog/2019/06/28/suburb-
profile-bankstown/ [Accessed 21 September. 2019].
d'Amato, M., (2015). Income approach and property market cycle. International Journal of
Strategic Property Management, 19(3), pp.207-219.
Kulikova, L.I., Samitova, A.R. and Aletkin, P.A., (2015). Investment property measurement
at fair value in the financial statements. Mediterranean Journal of Social Sciences, 6(1 S3),
p.401.
Population.net.au. (2019). Sydney population 2019. [online] Available at http:
www.population.net.au/sydney-population/ [Accessed 21 September. 2019].
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