Question 1
Evaluation Of The Pinckney Street Property
Pinckney Street is situated in the beacon hill neighborhood. The price of the property in this area has decreased in the last six months, but it continues to increase for some properties.The property is located on the corner of the street.The presence of natural light makes the property desirable for the buyers.However it was damaged by the fire in 2010, due to which there is a need of property renovation. It is expected that the renovation cost will be $450,000.
Risk and Rewards
The asking price for this property is $1 million and it is also in the price range of Edward. It is expected that net cash flow from its rentals will be $102,494 and it is justifying its price.However,it represents the estimated cash flows,which Edward calculates himself. It is expected that the actual rentals could be low as compared to the projected rents.
If it is so, then there is a high risk of negative cash flows, which will create a problem for Edward. However,the past experience shows that the profit potential in this area is high.The rents now range from $1800 to $4500 for one bedroom apartments and $2200 to $8000 for two bedroom apartments. In that case, the actual rentals will be much higher as compared to the projected rents and net cash flows will be more positive.
Question 2
Alternative Financial Options
Currently, Edward is planning to purchase Pinckney street through mortgage financing option. Under this option, Pinckney street will pledge to the bank. Edward can use other financial options to purchase this property.Edward can raise funds through private individual investors for this purpose. However,without any guarantees,it is difficult for Edward to get easy term loan and in that condition the interest rate will also be high.
Edward can use debt financing and can get a personal loan through a bank. By using debt financing, Edward’s property will not be pledged how ever, it is expected that higher interest rate will be charged in the absence of any guarantee.
Edward can arrange a partner in order to purchase this property. By getting a partner, his earnings will dilute. However,under such financing option, a large amount of interest cost will be saved. Edward’s risk will also be minimized under the partnership and his partner will carry the same risk and rewards that are faced by Edward.
Question 3
Qualitative Analysis and Search Methodology
Edward is planning to invest his savings in the real estate business. For this purpose, he spends his free time in the real estate field to gain some experience before making any investment. He obtained a copy SMSA to study about the background of beacon hill residents demographically, which helped Edward to know about their age breakdown, marital status and income level.
He thoroughly checked the map to find the distance of shopping malls, offices and other popular places from Beacon Hill and he found that all these places were situated at a short distance from Beacon Hill. Edward also analyzed the real estate sections of newspapers in order to know about the names and numbers of brokers and the type of offerings and prices.
It helped Edward in understanding the market conditions.Edward also used online data to check mortgage rates for different mortgage products available in the market. It helped Edward in understanding the different available ranges of individual and complex properties. His friend also helps him in his search by telling him a very useful website, which provided him the data of recent sales along with available properties for comparison. This qualitative analysis provided Edward’s past and external data, which are available to everyone easily, but it helps a lot in understanding the nature of real estate business.
Question 4
Quantitative Analysis
It is expected that by purchasing this property, Edward will be able to generate $1024,94 cash flows from operations. Edward performed this projection of funds on the basis of past data and current rentals paying by tenants. These cash flows seem to be realistic because rents in this area are very high and supposed to be increased in future.
Edward is facing cash problems for regarding the purchase of this property. It is expected that mortgage option of financing will be used to raise funds for purchasing.Currently, Edward has two offers of mortgage financing from two different banks on different terms.
Exhibit 1 represents the evaluation of two different options. The figures show that the second option of financing provides higher loan amount with low interest. Also,it minimizes the difference of required amount, and the available amount for the purchase of property......................
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