Real Estate Transactions: Residential Real Estate - Dissertation Example

Real Estate Transactions: Residential Real Estate Introduction For a preponderance of individuals, capitalizing in residential property is a measure whose benefits can only be regarded as a long term initiative. However, this perception, limited as it may be, is predicted to take a back seat in the situation whereby a property bubble bust does occur in Australia. A real estate bubble is the situation whereby properties, in this case Australia, are valued much higher than their actual worth. This circumstance does, at regular intervals, impact both local and consequently global markets. However, this unfortunate contingency aside, residential property has a distinctive feature that is responsible for differentiating it from other avenues of investment. Unlike other avenues of investment, residential property is tangible and is linked with permanence. Very few other investment prospects offer these two unique aspects. However, before one can engage in the business of investing on a prime residential property, careful financial analysis of the property must be made. Preceding this vital step is the individual examination of the property of interest. As such, this paper explicates on the process of examining a prime residential property and subsequently the financial analysis that follows on such. Evaluation Before engaging in property evaluation, it is of fundamental importance to first cognizant of the factors that influence, directly or indirectly, the value of property. In an endeavour to perform decent financial analysis, two idiosyncratic steps need to be embraced. First, information pertaining to the particular investment must be input into a financial model. The second step entails analysing the results sourced from the select financial model (BELL, 1985, 104). This analysis will then shed light into the viability of the venture with regards to its profitability state. However, this profitability may not necessarily be in the strict context of financial gain. Some investors are interested in the non-monetary gain to be accrued from the investment. However, this paper shall not adopt such a perception towards the property of concern. Interest is primarily based on the monetary gains to be sourced room investing in the said property. One factor that influenced my judgment on the financial analysis of the property is the property details. This entails the physical design of the building and it ranges from the total number of units, their respective size in terms of square footage and the utility measuring design. Although other factors were in consideration, these mentioned factors assumed my core consideration. Another prime matter of concern stems from the purchase information. In this context, each of the three properties that I have compared with my earlier chosen property had to have clear purchase information. Purchase information comprises of information relating to the respective purchase price, price of any improvements and refurbishments that are necessary amongst other related costs to be incurred. An additional factor to take into consideration is the financing aspect. Investing in prime residential properties requires one to take out a loan so as to be in a position to finance the project (MCLEAN and ELDRED, 2003, 27). As such, in each property the total loan amount needed had to be analysed. When this amount is found to be too high, the property is thus not a viable option in my scenario. Subsequently, the down payment on the property should also be analysed in addition to the interest rate to be charged on the respective loan and the closing costs. The importance of this financial factor cannot be overestimated as it forms the backbone of the investment. In the absence of proper and adequate financing, the monetary potential of the residential property will not be fully explored. While on the subject of finance, it is also of vital standing to investigate and find out how much income will be accrued form the property; this in relation to rent payments. Since rent is the primary source of income from the residential property, it should be evaluated as to fine detail. This is inclusive of all expenditures to be paid for the property; as such both gross and net income should be calculated. In matters concerning investment, ignorance on the property at hand tends to be a costly affair. This translates to mean that aside from property taxes, insurance on the property and the associated maintenance cost should be known in advance. Throughout this process attributed to financial analysis, the quality of information that is received is of extreme importance (POORVU, 1995, 136). The information should be of the nature that is highly reliable plus accurate. This arises from the verity that quality of data collected, often proves the only factor that impedes the property from appearing great on paper but unviable in the actual sense (HIGGINS, 1998, 59). The value of a residential property is directly correlated to the income it sources for its owner, thus if it does not suit this basic requirement then its value to the owner will significantly be reduced. Simply put, poor quality and ill informed financial analysis is to the detriment of the relative worth of the residential property (HEROUX and WALLACE, 1973, 105). The details of the respective properties were relatively easy to come by as first hand information was provided by the seller and the agent. However, for comprehensive and much more detailed information the local county records office is the appropriate source. Concerning the purchase information, aside from the negotiable purchase price, the core concern is the necessary maintenance and improvement measures that are in progress. These measures should continue to be undertaken as they ensure that the income accrued from the residential property is not impeded (MILES et al, 2000, 74). In the event that there is no improvement or refurbishment activities taking place, it is advisable to hire the services of an expert building inspector, so as to ensure that no hidden problems exist within the confines of the respective property. Regarding the financing details, it is imperative to first seek an approval of the loan required to finance the investment. This approval is usually in the form of a letter of approval. Additionally, the cost of the loan and the required down-payment should be expounded on and subsequently negotiated. Details about the nature and dynamics associated with the income to be accrued need to be sourced directly from the seller. However, this data collected should not be regarded with complete certainty. This stems from the fact that in most cases the seller inflates certain figures in an endeavour to raise the value of the property. As such, it is highly beneficial to contact the respective company running the property, if there actually is one. In relation to income, the details pertaining expenses of running the residential property should also be sourced directly from the seller or the company running the property (SCHWARTZ, 2000, 28).At this juncture, the services of an experienced building instructor can not be overestimated. This arises from the fact that the inspector can aid in expounding on future major repairs that are bound to arise. The houses: Since my first study was based on the locality of Happy Valley. I hence sought an area that could have the same features provided by Happy Valley. With this fact in mind, I started my exploration of the south side of Australia. Amongst the majority of localities I researched on, the one that stood out has to be Adelaide. This region has experienced a decline in its relative population since the 1920’s. However, around the nineteen nineties, there was a steady turn around whereby up to date the population is increasing. It has been forecasted that this increase in population will continue to grow throughout the foreseeable future. Akin to Happy Valley, Adelaide has some distinct features that are responsible for propagating it as a prime tourist destination (LANDRY, 2003, 42). Aside from these, what really influenced my decision to explore Adelaide has to be its provision of social amenities. Key amongst these amenities has to be eleven parking stations. As I toured one in particular, the central market parking station, I noticed its clean environment and ever present security. This is highly beneficial as these amenities have the power to woo tenants into relocating into the area. Also, of significant importance has to be the local library and the community wellness centre. When all these important assets are coupled with the free bus service that is available to residents, then it is highly unlikely that investing in a residential property is not a viable decision (BEYER, 2002, 32). Given the enabling market for investing, I set off to find three properties that had been traded in the past one year and compare than to my residential dwelling that I had earlier selected. House one The first residential property is a four storey building that is characterized by eight units. It is located near a school and a market that is a ten minute ride from the residence. Though the agent at first was not willing to assist me in my queries I was however able to change his mind. Description Unlike the previous residence I had visited, this one was more spacious and thus consequently had fewer units on offer. An added advantage is that it had no pending improvements or refurbishments that were to be undertaken. The rent for each of the eight two bedroom units is priced at $4000. Thus, the cumulative rent is $ 32000 per month. The agent was kind enough to avail this valuable information to me. However, pertaining sale, the agent did not offer mush information. However, research from the local county office elaborated that this particular residential building had not yet updated its sale information. As such, I am left at odds on whether to guess the figure in an attempt to give a rounded off value or to ignore the sales value. However, it is my endeavor that this paper deal only with actual fats on the ground and not entertain baseless conjectures. The county office, however, informed me that the building was sold in early last year. But both parties had not updated the specifics of the sale. At the time of my touring the building, I was lucky enough to find a resident who did not harbor any qualms with me touring her unit. Comparison Unlike my initial residential building that had medium sized rooms, this one had bigger rooms with a special design tiles. The location is in a busy street as such the value is bound to rise. However, the parcel of land on which the building is located is small in size. It is actually smaller than the subject property. Repairs have just been finished and thus it is ready for occupancy. Two units are still not occupied. As such, this building is inferior to the subject but is still slightly expensive as compared to the subject. House two Description The second house that I toured had fifteen units and had just recently changed ownership. Each unit rents for $6000 per month. This gives the cumulative income of $90,000 that is to be sourced from the building arising solely from rent. Unlike the free entry that I had experienced in the two residential properties I had earlier visited, this property had restricted entry. Given this predicament that was now facing me; I implored to use the security head cum caretaker to be the source of my information concerning the building. Via this avenue, I was then in a position to find out that the building specifics. The units are all three bed roomed apartments. They are characterized by a large sitting room, dining room and a medium sized store. Comparison A unique feature of this building is the requirement levelled against a new tenant for them to be given the unit. The agent requires the new tenant to pay two months prior to moving into the respective units. This is different from the other residential buildings whereby only two weeks rent is demanded before one can move into the building. The buildings proximity to certain social amenities is bound to raise its value. These social amenities appeal to new tenants who favour being near amenities like schools and market. The fact that the building is characterized by constant security presence is also a factor to consider when determining the total rent that ought to be charged. The state of the building depicts the modernity of its theme. It will not be due for improvement in the foreseeable future. This residential property is characterized by ample parking space and its location from the busy and noisy town is a plus factor for its high worth. In this context, the land on which the property rests is superior in comparison to the subject. Each unit in this property is more expensive and of greater quality as compared to the subject. As such, this is the resonance behind the significant difference between both their respective prices and rent. House three The last and final residential property under evaluation is distinctively different from the other buildings including the subject. This stems from the fact that this residential property is being sold in units rather than the whole building. Description The property has sixteen units in total. Each unit is being sold for an approximate $ 241,000. Once all units in the buildings are sold, then the owner stands to make an approximate $ 3,865,000. This is inclusive of the taxes to be paid and the significant agent fees. To date, not all units have been sold. In fact, a little less than half the unit still remains unoccupied. This absence of tenants might be due to the fact that the building is relative ly new or from the verity that it is a substantial distance form the city center. Comparison In this case, I had already conducted online research and found the appropriate date to visit the property. This date coincided with the showing of one of the units. Just like the previous building, this one has three bedrooms. However, the relatively small sized rooms do not warrant the exorbitant price of the units. The agent explained that the value was demanded given the serene environment tenants will be exposed to. However, it is my opinion that this fact unaided should not be used to give justifications for overpricing the units. The property is built in a comparatively small portion of land. The land is actually smaller than that of the subject building. Since this is the only property that is selling units, it would be flawed to attempt to compare it with the subject building. However, this property is located considerable distance away from the city centre. This must be to the detriment of the value of the property. Reflective summary This assignment has provided an avenue for exploration into the dealings of property and specifically residential property investment. The lessons I have learnt throughout the entirety of this assignment is that importance of individual assessment is a basic skill one has to have so as to make informed decisions pertaining investing. Without this skill, I will be inadequate and thus the potential for profit maximization will be impeded. Additionally, the financial analysis aspect during investment is often the difference between successful property investment and failed investments (GREER & FARRELL, 1984, 79). The most interesting parts of this assignment were the travelling bit. It gave me an opportunity to visit places I would normally not venture into. Additionally, I gained access to residential buildings thatcan only be termed as upscale. I also gained important people skills. The assignment forced ne to interact with people from different social backgrounds while sourcing important data. However, I did not like the tasking demands of this assignment. It jerked me away from my relaxation zone, but the knowledge I gained cannot be quantified. References BELL, B., 1985. Property management: a guide to marketing, systems and financial analysis. Canberra, Real Estate Institute of Australia. BEYER, G. W., 2002. Real estate transactions: residential real estate. [St. Paul, Minn.?], Thomson West. GREER, G. E., & FARRELL, M. D., 1984. Investment analysis for real estate decisions. Chicago, Dryden.HEROUX, R. L., & WALLACE, W. A. 1973. Financial analysis and the new community development process. New York, Praeger. HIGGINS, R. C. 1998. Analysis for financial management. Boston, Mass, Irwin/McGraw-Hill. LANDRY, C. 2003. Rethinking Adelaide: capturing imagination. Adelaide, Department of the Premier and Cabinet. http://www.thinkers.sa.gov.au/images/Landry_Report.pdf. MCLEAN, A. J., & ELDRED, G. W. 2003. Investing in real estate. Hoboken, N.J., Wiley. MILES, M. E., BERENS, G., & WEISS, M. A. 2000. Real estate development: principles and process. Washington, D.C., Urban Land Institute. POORVU, W. J. 1995. Financial analysis of real property investments. [Cambridge, Mass.], Harvard Business School. SCHWARTZ, R. D. 2000. Residential real estate. Minneapolis, Minn, Minnesota Institute Legal Education. Appendix Unit3 493 Blackburn Road, burry wood East. Photo: Worthing Avenue, Burwood East, Victoria. Photo: Worthing Avenue, Burwood East, Victoria, 3151. Photo: Read More