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.

Answer rating: 100% (QA)

To recommend which investment is better we need to calculate the future cash flows of each investment and then calculate the present value of those ca... View the full answer