Property Investment and Risk Management

This document discusses the financial feasibility of investing in a property located in Auburn, New South Wales, Australia. It covers the property market in the region, requirements of mortgage, ratio calculation and analysis, and more. The document concludes that the investment in the property is not financially feasible as the expected net present value of the property is negative.

Running head: PROPERTY INVESTMENT AND RISK MANAGEMENT
Property Investment and Risk Management
Name of the Student:
Name of the University:
Authors Note:

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PROPERTY INVESTMENT AND RISK MANAGEMENT
Contents
Introduction:....................................................................................................................................2
Property market:..............................................................................................................................3
Requirements of mortgage:..............................................................................................................4
Ratio calculation and analysis:........................................................................................................7
Conclusion:....................................................................................................................................10
References:....................................................................................................................................12

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PROPERTY INVESTMENT AND RISK MANAGEMENT
Introduction:
18-20 Ettalong Street property is situated in Auburn, New South Wales, Australia has a total land
area of 1220 square meter. The property is an ideal property for tenant investment with whole
extent of property is fully furnished and desirable for tenant agreements. The property is highly
desirable as the location of the property boosts of the following characteristics:
I. 22 primary schools located around the location of the property.
II. 70 DA approved places.
III. The metro is situated nearby the property.
The map below will help the prospective investors to understand the exact location of the
property.
Image: The location map of the property.

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PROPERTY INVESTMENT AND RISK MANAGEMENT
The infrastructure and transportation facility in and around the property is extremely efficient
making the property immensely attractive for the investors.
Property market:
The property market in Australia and specifically in NSW is extremely vibrant. The demand of
property in the region is quite high. This is mainly due to both the environment and infrastructure
of the region. Over the years the property market in Australia has developed at a rapid speed and
NSW has been in the fore front of this development. The demand of property in NSW region is
quite high but the supply commensurate property has made the property market in the region
vibrant and prosperous. The vacancy rate in region for rental property is generally within the
range of 15% to 20%. The average rent in NSW is quite high due to the high demand of rental
property in the region. Thus, the investors have added incentive of making available of their
properties for rental agreements. High rate of return is generally earned by the investors by
entering into rental agreements with tenants in the region (Sweeney, 2014).
In this case the location of the property, i.e. 18-20 Ettalong Street property in Auburn, New
South Wales makes the property even more attractive for the investors as it has number of
characteristics which are extremely important for any tenants including close proximity of
number of primary schools and other infrastructural advantages. At present the rental of the
property is $93,600 per annum as per the best estimates made from the available information
("Real estate investment decision making – a review", 2017).
The stamp duty for the property is estimated to be $116,115. The property can be used for office
purposes as it has a floor area of 1220 square meter.

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PROPERTY INVESTMENT AND RISK MANAGEMENT
Requirements of mortgage:
The property has 4 houses in 2 block of land with the following features:
I. Number of good size bed room – 4
II. Lounge room with air conditioner (huge).
III. Modern kitchen with large space.
IV. Bathrooms fully renovated – 2.
The current weekly rent of each house situated in the property is $450 and with 4 houses in the
property the expected annual rent is calculated below.
Particulars Amount ($)
Weekly rent 450.00
Number of houses 4
Total weekly rent ( 450 x 4) 1,800.00
Total annual rent (1800 x 52) 93,600.00
As per realestate.com.au the current market price of the property is around $1,900,000. On the
basis of its current market price the calculation of mortgage payments with different deposit
amounts are calculated below.
Property value Deposit Loan Interest Loan

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PROPERTY INVESTMENT AND RISK MANAGEMENT
rate term
1900000 0 1900000 3.74% 30
years
Annual repayment 106,435.09
Monthly repayments 8,788.00
If the prospective investor looks to finance the entire cost of the property by a loan then the
annual repayment of the loan would be $106,435.09 with 30 years loan term. The monthly
repayment would be $8,788 to repay the loan over the 30 years loan term (Metzner, 2018).
With 10% down payment the mortgage payments are calculated below:
Property value Deposit Loan Interest rate Loan
term
1900000 190000 1710000 3.74% 30
years
Annual repayment 95,791.58
Monthly repayments 7,910.00

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PROPERTY INVESTMENT AND RISK MANAGEMENT
If the prospective investor makes 10% down payment at the time of acquisition and finance the
balance amount of the property by taking a loan then the annual repayment of the loan would be
$95,791.58 with 30 years loan term. The monthly repayment would be $7,910 to repay the loan
over the 30 years loan term.
Instead of 10% of down payment if the investor decides to make 20% down payment and finance
the balance amount by a 30 year term loan then the annual and monthly repayment requirements
under mortgage loan would be as following.
Property value Deposit Loan Interest
rate
Loan
term
1900000 380000 1520000 3.74% 30
years
Annual repayment 85,148
.07
Monthly repayments 7,031
.00
If the prospective investor makes 20% down payment at the time of acquisition and finance the
balance amount of the property by taking a loan then the annual repayment of the loan would be
$85,148.07 with 30 years loan term. The monthly repayment would be $7,031 to repay the loan
over the 30 years loan term (Baum, 2017).

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PROPERTY INVESTMENT AND RISK MANAGEMENT
Ratio calculation and analysis:
Year Annual rent Annual repayment
with 20% down
payment
Surplus PV factor
@3.74%
Present value
of surplus
1 93,600.00 85,148.07 8,451.93 0.
96
8,147.22
2 93,600.00 85,148.07 8,451.93 0.
93
7,853.50
3 93,600.00 85,148.07 8,451.93 0.
90
7,570.37
4 93,600.00 85,148.07 8,451.93 0.
86
7,297.45
5 93,600.00 85,148.07 8,451.93 0.
83
7,034.36
6 93,600.00 85,148.07 8,451.93 0.
80
6,780.76
7 93,600.00 85,148.07 8,451.93 0.
77
6,536.30
8 93,600.00 85,148.07 8,451.93 0.
75
6,300.66

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PROPERTY INVESTMENT AND RISK MANAGEMENT
9 93,600.00 85,148.07 8,451.93 0.
72
6,073.51
10 93,600.00 85,148.07 8,451.93 0.
69
5,854.55
11 93,600.00 85,148.07 8,451.93 0.
67
5,643.48
12 93,600.00 85,148.07 8,451.93 0.
64
5,440.03
13 93,600.00 85,148.07 8,451.93 0.
62
5,243.90
14 93,600.00 85,148.07 8,451.93 0.
60
5,054.85
15 93,600.00 85,148.07 8,451.93 0.
58
4,872.62
16 93,600.00 85,148.07 8,451.93 0.
56
4,696.95
17 93,600.00 85,148.07 8,451.93 0.
54
4,527.62
18 93,600.00 85,148.07 8,451.93 0. 4,364.39

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PROPERTY INVESTMENT AND RISK MANAGEMENT
52
19 93,600.00 85,148.07 8,451.93 0.
50
4,207.05
20 93,600.00 85,148.07 8,451.93 0.
48
4,055.38
21 93,600.00 85,148.07 8,451.93 0.
46
3,909.17
22 93,600.00 85,148.07 8,451.93 0.
45
3,768.24
23 93,600.00 85,148.07 8,451.93 0.
43
3,632.39
24 93,600.00 85,148.07 8,451.93 0.
41
3,501.44
25 93,600.00 85,148.07 8,451.93 0.
40
3,375.20
26 93,600.00 85,148.07 8,451.93 0.
38
3,253.52
27 93,600.00 85,148.07 8,451.93 0.
37
3,136.23
28 93,600.00 85,148.07 8,451.93 0. 3,023.16

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PROPERTY INVESTMENT AND RISK MANAGEMENT
36
29 93,600.00 85,148.07 8,451.93 0.
34
2,914.17
30 93,600.00 85,148.07 8,451.93 0.
33
2,809.11
Present value of total surplus 150,877.59
Less: Initial down payment 380,000.00
Net present value (229,122.41)
Conclusion:
As can be seen from the above that the investment in the property if the current rent does not
increase is not going to be financially beneficiary for the investor as the expected net present
value of the property is negative. The NPV of the property is ($29,122.41) clearly depicting the
lack of financial feasibility of investing in the property (Ayotunde Olawande, 2017).

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PROPERTY INVESTMENT AND RISK MANAGEMENT
References:
Ayotunde Olawande, O. (2017). Harnessing real estate investment through proper tenant
selection in Nigeria. Property Management, 31(8), 383-397. doi:
10.1108/02637471111154827
Baum, A. (2017). Real estate: investment or operation?. Property Management, 23(5), 11-19.
doi: 10.1108/pm.2003.11321aaa.001
Metzner, S. (2018). Transferring outranking models to real estate management. Journal Of
Property Investment & Finance, 36(2), 135-157. doi: 10.1108/jpif-01-2017-0009
Real estate investment decision making – a review. (2017). Journal Of Property Investment &
Finance, 30(5), 112-221. doi: 10.1108/jpif.2012.11230eaa.002
Sweeney, F. (2014). INTERNATIONAL REAL ESTATE DIVERSIFICATION — A VIABLE
INVESTMENT STRATEGY. Property Management, 8(5), 317-326. doi:
10.1108/eb006668