An investor is considering two investment opportunities. Option one is a two-bedroom house, the other is a
Question:
An investor is considering two investment opportunities. Option one is a two-bedroom house, the other is a two-bedroom townhouse. The investor will sell the property after seven years. Given the following information, which investment would you recommend to the investor, and why?
2 Bedroom House | |
Purchase price (excluding costs) | $1,000,000 |
Purchasing costs | 6% of purchase price |
Gross weekly rent | $700.00 |
Annual operating expenses | 10% of annual gross rent |
Forecasted annual rental growth | 2% per annum |
Selling costs | 2% of sale price |
Discount Rate | 5% |
Question 2 continues over the page.
2 Bedroom Townhouse | |
Purchase price (excluding costs) | $585,000 |
Purchasing costs | 5% of purchase price |
Gross weekly rent | $500.00 |
Annual operating expenses | 10% of annual gross rent |
Forecasted annual rental growth | 1.5% per annum |
Selling costs | 1.5% of sale price |
Discount Rate | 6% |
Assume that rent is paid annually in advance and the reversion (terminal) capitalisation rate is the same as the investors required rate of return.