QUESTION
Q. 1
From the following information calculate the value of a residential building to its owner.
An investor owns a residential unit building that contains the following units:
2 x 1 bedroom – all rented for $350 per week
4 x 2 bedrooms – all rented for 4450 per week
1 x 4 bedroom – rented for $1000 per week
The block is currently fully let.
Vacancy factor of 2 weeks / year
Applicable yield 6%
Outgoings as follows;
Insurance – $12,500 pa
Allowance for Repairs & Maintenance $2,000 pq
Management fees 6 % of gross
Cleaning (common areas) $2,500 pa
Repairs to owners yacht $5,000
Land Tax $17,000
Council rates $7,500 pa
Water rates $9,000pa
Replacement of common area carpets to be carried out in this current year $11,000
Show all calculations, workings and analysis undertaken to determine your valuation.
Q. 2
Work out the effective rental on an industrial property from the following information.
Term certain 10 years, option 10 years.
Demised area 10,000m2
Net rental $160/m2 pa, paid monthly in advance
Discount rate 8.7%pa at monthly rests
Incentive 18 months rent free
Q. 3
What is the value of a term certain if the cash flow of $10,000 pa is received at the start of each year for the next 25 years? Use a remunerative rate of 13% pa and a replacement rate of 9% pa effective.
Q. 4
John is negotiating the purchase of a strata titled industrial office/factory unit for $750,000. John contacts three local real estate agents who suggest he may be able to sell the property for $1,300,000 in ten years time.
a) Calculate the implied rate of annual effective growth (two decimal places)
b) If John requires an annual growth rate of 8% what would be the amount of gross sale consideration he would seek to achieve?
Q. 5
Please solve the following capitalisation rate problems
a) If a building brings in $50,000 (net) pa, and recently sold for $800,000
b) If a building has a rental income (net) of $100,000 pa, and comparable buildings are showing a Yield (Cap Rate) of 8.5%
c) If a project shows a return of 7.2% what is the years purchase?
Q. 6
Calculate the simple interest and principle amounts for the following periods.
a) $7,500 for 8 months at 7.2%
b) $12,600 for 11 months at 9.75%
Q. 7
An investor is considering the purchase of shops 4 and 5 in the New Centre. The total gross rental return for both shops is $93,000 per annum with outgoings borne by the lessor being $7,400 per annum. The asking price is $1,250,000. The investor can get mortgage finance at 7.65% per annum and has a $350,000 deposit.
a) What is the gearing ratio?
b) What is the return on equity?
Q. 8
As a first time home buyer, you are looking at taking out a mortgage for $250,000 to purchase your home. You have approached four major banks and they have quoted you different interest rates with different repayment options, as shown on the following table:
| Bank | Interest Rate | Rests |
| CBA | 13.2% | Quarterly |
| Westpac | 13.07% | Monthly |
| ANZ | 12.96% | Fortnightly |
| NAB | 12.96% | Monthly (in advance) |
You are very confused as to which bank will offer you the best loan deal and have sought the advice of a valuer to advise you which of these four banks would offer you the best loan deal.
Work out which would be the most attractive loan and show the proof as to why.
Q. 9
You are considering the purchase of a machine costing $650,000, with installation costs of $40,000. You can borrow these costs at 8.5% p.a. fixed.
The projected income streams are as follows:
Year 1 $120,000
Year 2 $120,000
Year 3 $120,000
Year 4 $120,000
Year 5 $120,000
Year 6 $125,000
Year 7 $125,000
Year 8 $100,000
Maintenance will be required in year 3 and year 5, at a cost of $25,000 each year.
The expected second hand value of the machine at the end of its working life is $150,000.
Q. 10
A small industrial building has two tenants.
Tenant A pays $315/m2 p.a. Tenant B pays $275/m2 p.a. Market data for comparable properties is as follows:
Comparable 1 – NLA 600m2, rental paid $186,000 pa, no adjustments for outgoings.
Comparable 2 – NLA 450m2, rental paid $130,500 pa, no adjustments for outgoings.
Both tenants A and B have a demised area of 500m2, an option period of 3 years, with a market review upon exercise of the option. Your investigations have revealed that 9% is an applicable yield. What is the value of the lease to each of the tenants, if they both have five years remaining on their leases?
Q. 11
You anticipate that you will need to replace your brand new BBQ in four years time and you are considering opening up a bank account to save up for the replacement cost of the BBQ then. Your bank account will pay you 6% p.a. nominal in bank interest and you expect the replacement cost to be $3,500. If you put money away at the start of each month, how much will you have to bank each month to save up for a new BBQ in four years time?
Q. 12
In order to secure a lease of the premises for a five year term, tenant A has agreed to pay an upfront lump sum payment of $15,000 to the landlord. The base rent is $400/m2 p.a. for 250 m2 of office space in a city building. The tenant has also agreed to pay 19% of total outgoings ($17,500 p.a.). The other tenants are also responsible for the payment of the balance of the building outgoings (81%). What is the true monthly net income received by the landlord from tenant A, when the current discount rate is 8%?
Q. 13
a) If you wish to pay your $45,000 car loan off in six years with an interest rate of 10.5% (at monthly rest), what will your monthly repayments be?
b) On the above loan (a), if you were to make the repayments every six months (at 6 monthly rests), in lieu of monthly payments, how long will it take you to pay off the loan?
Q. 14
The rental on a small retail shop is $4,800 per month, paid in advance. The current discount rate is 7.79% effective. If the tenant wishes to pay two years rent in advance how much money must the tenant give to the lessor?
Q. 15
What interest rate compounding at quarterly rests would you need to achieve to have a quarterly payment of $750 compound to $120,000 over 17 years?
Q. 16
A 108 sq m Strata shop in Red Square returns $685/m2 p.a. You have analysed a number of comparable sales that show a capitalisation rate of 8% could be adopted for the subject property.
The Outgoings paid by the lessor (non-recoverable) are as follows:
Council Rates $1,500
Water Rates $1,000
Insurance $1,500
Management Fee $2,500
Vacancy Allowance $2,000
Calculate the value of the subject shop.
Q. 17
Mr. Hugh P. Looter has decided to replace his coal powered rolling mill, with a newer solar powered model. There are two machines on the market that meet his requirements and he has asked you to assess which, if any, of the machines he should purchase. His only concern is the return on the machines, as both produce a comparable amount of toxic waste. From your diligent investigation you have determined that 8% is an applicable rate of interest. Which machine would you recommend that Mr. Looter buys?
Greenest Green Rolling Machine
Cost – $1.7m
Installation cost – $200,000
Predicted useful life of 6 years
Salvage value $75,000
Income predicted as follows
Year 1 – $390,000
Year 2 – $400,000
Year 3 – $420,000
Year 4 – $435,000
Year 5 – $450,000
Year 6 – $465,000
Super Solar Rolling Machine
Cost – $1.4m
Installation Cost – $140,000
Predicted Useful Life of 8 years
Salvage Value $0
Income predicted as follows
Year 1 – $270,000
Year 2 – $270,000
Year 3 – $280,000
Year 4 – $280,000
Year 5 – $290,000
Year 6 – $295,000
Year 7 – $300,000
Year 8 – $305,000
Q. 18
Which of the following (if any) pieces of equipment should you recommend your client to purchase, based on the following information. Which machine produces the worst results for your client? Finance on all machines can be obtained at 8.5%.
Please show all your calculations, including your long hand working, for each of the machines.
Machine A
Yearly maintenance costs of $1,000
Year 0 – installation $50,000
Year 1 – income $14,500
Year 2 – income $15,000
Year 3 – income $16,000
Year 4 – income $16,500
Machine B
Maintenance in year 2 at a cost of $10,000
Year 0 – installation $42,000
Year 1 – income $14,000
Year 2 – income $15,000
Year 3 – income $16,000
Year 4 – income $17,000
Machine C
Maintenance in years 1 and 4, $2,500 for each maintenance overhaul undertaken.
Year 0 – installation $45,000
Year 1 – income $16,500
Year 2 – income $15,500
Year 3 – income $14,500
Year 4 – income $13,500
Q. 19
Please calculate the initial yield, the reversionary yield and the equivalent yield from the information given about a warehouse that you have contracted to value. You are also required to give a current valuation of the premises.
Comparable leasing evidence suggests a rate of $900pa/m2
Demised area is 239m2
Current lease payments are $197,000 pa
All outgoings paid for by lessee
Date of valuation 01.09.07
Date of next review is 28.02.09
Applicable market yields range from 7.8% to 8.3%.
SOLUTION
| Inflows | Formula | Total | |
| 2 X 1bedroom | $350 | $17,500 | |
| 4 x 2 bedrooms | $4,450 | $222,500 | |
| 1 x 4 bedroom | $1,000 | $50,000 | |
| Total | $290,000 | ||
| Outflow | |||
| Insurance | $12,500 | ||
| Repairs & Maintenance | $2,000 | ||
| Management fees | $17,400 | ||
| Cleaning (common areas) | $2,500 | ||
| Yatch Repairs | $5,000 | ||
| Land Tax | $17,000 | ||
| Council Rates | $7,500 | ||
| Water Rates | $9,000 | ||
| Carpet Replacement | $11,000 | ||
| Total | $83,900 | ||
| Net Cash flow for the year | $206,100 | ||
| Value of the property | $3,435,000.00 |
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| Inflows | Formula | Total | |
| 2 X 1bedroom | $350 | $17,500 | |
| 4 x 2 bedrooms | $4,450 | $222,500 | |
| 1 x 4 bedroom | $1,000 | $50,000 | |
| Total | $290,000 | ||
| Outflow | |||
| Insurance | $12,500 | ||
| Repairs & Maintenance | $2,000 | ||
| Management fees | $17,400 | ||
| Cleaning (common areas) | $2,500 | ||
| Yatch Repairs | $5,000 | ||
| Land Tax | $17,000 | ||
| Council Rates | $7,500 | ||
| Water Rates | $9,000 | ||
| Carpet Replacement | $11,000 | ||
| Total | $83,900 | ||
| Net Cash flow for the year | $206,100 | ||
| Value of the property | $3,435,000.00 |
