Real Estate sales fees: $350 +3.75% on first $150,000 and 3% on the remainder of the sale price
+ legal fees ($3000 increasing at 2% p.a)
You are required to assess two investment options to determine which proposal offers the best return for the least risk. Your client has $350,000 to invest in property and has been offered the following investment proposals: (i) To buy an inner-city hotel. (ii) To buy shares in a private company that owns a single commercial property
Your client is a single professional woman with no dependents. Her annual salary is approximately $60,000 per annum. The term of the investment is to be five years and the client wishes to achieve the best return on her equity over this period without incurring too much risk The investment options are outlined on the following pages, with assumptions and instructions following.
Investment Option One This property comprises two, two-storey turn of the century residences converted into a private hotel located in an inner-city suburb of Wellington.
. The asking price for the hotel is $525,000, the assessed value
: Capital growth is expected to be approximately 1% per annum over the next five years.
. The rental is assessed at $80.000 pa from November of the current year and will be reviewed at two yearly intervals, with these increasing at 2.5% per annum.
Landlord's expenses in the first year amount to $1,000 for repairs and maintenance and these are likely to increase at 2% per annum.
Legal fees are payable on both the purchase and sale of the property. Upon purchase these amount to $3.000.
: Inflation is running at 2% per annum, i.e. expenses increase at the rate of inflation
Your client can arrange for a classical mortgage (i.e. full amortizing loan) with her bank at an interest rate of 10.5% per annum with monthly repayments over 20 years. She will contribute the balance of the purchase price in the form of equity. The mortgage would be repayable on the sale of the property.
: Real estate fees on the sale of the property are as per those outlined in the Investment Analysis exercise.
