Executive Summary
Introduction
The family is entering into the property market by developing a four-floor rental building. The rental property will be completed in one year and will have forty units.
Statement of needs
The aim of the family is to gain financial stability in the face of the imminent retirement of the household head, the deficits in the family budget, and the financial struggles to finance the college education of the two children.
Financial Information
The cost of the development is 2,583,000 dollars. The family will seek financing for 250,000 dollars at an interest of 17% to be paid in 5 years. Each rental unit will generate an income of 800 dollars a month. The total annual income is 384, 000.
Risk and Implications of Financial Analysis
The family will be liquid in the entire five-year period as shown by the cash flow analysis. The cost-benefit analysis shows that the costs will be adequately compensated by the benefits, hence the recommendation to go ahead with the investment. However, the success is threatened by risks such as the volatility of the marketing and its effects on the vacancy rates and the willingness of prospective occupants to meet the rental requirements.
Introduction
My family in the last three years has been contemplating about entering into the market property business. As a result, we have been saving for purposes of developing a rental house so that we can increase our sources of income. Rental house business is one of the most profitable businesses in the country. Currently, my family is developing a four-floor rental building. The rental house is under construction and is expected to be completed in the next one year. The house has forty rooms and once is completed the constructor contracted by the family will hand over the building to use. The house will be managed by the family in terms of determining its occupants. The main target of our rental house will be families as the building is being developed in an area that is conducive for families to live.
Statement of Needs
The goal of any family is to have financial stability. In my family, we are three siblings. Currently, my father is almost nearing retirement while my mother is working at part-time jobs. The three of us are in college and the demand for meeting our college education, in terms of tuition fees, basic needs and accommodation has not been an easy thing for my family. The cost of education in the recent years has been on the rise, making families with more than two kids in college to struggle a lot in meeting their costs of education. Our family has not been left behind as my parents have been struggling to ensure that we complete education. The family total annual income is $ 60,000, and our annual expenses exceed the income by $20,000. In order to meet the deficit, my father has decided to develop one of his properties that he inherited from his parents three years ago.
The house rental business is expected to generate over 300,000 dollars annually, and this will be a great boost to our family. Given that our dad is going to retire soon, the house rental business will generate alternative income for the family that will ensure that all family needs are met. In order to have a stable financial future for my siblings and me, the extra income generated from our business will be saved through mutual funds so that it can generate more income for the family.
Project Definition
My family is developing a rental house with four floors and forty rooms to be rented out to families with a need of a place to live. The house rental business is expected to help the family generate extra income. The main goal of engaging in the business is to ensure that the family has a stable source of income in the future so that all family financial needs can be met without struggling. In addition, the business will form the basis for the family to venture into other real estate projects in the future, such as building houses and selling them at a profit.
Approaches to Developing the Paper
One of the steps aimed at ensuring that our house rental business is fully developed is acquiring extra financing from a financial institution that will be repaid in the next five years. The loan will help in getting the funds needed to complete the building so that it can be marketed to the target customers. Secondly, the family will have to develop a management plan of how the business and finances generated from the business will be used, in terms of repaying the loan, saving and meeting other expenses associated with running the house rental business.
Data Block
The cost of constructing each of the forty units that will comprise the rental property is 64,575 dollars. In total, the construction cost will amount to 2,583,000 dollars. Given the imminent retirement of my father and the fact that my mother only worked part-time jobs, the financial institutions could only advance a load of 250,000 dollars to be paid in five years at an interest of 17%. Each of the units will bring in revenue of 800 dollars a month. Collectively, the forty units will generate revenue of 32,000 dollars monthly. In one year, the collective revenue will amount to 384,000 dollars. The tenants are expected to foot the maintenance costs for some of the repairs in their rental units. However, the family will spend 6000 dollars annually for some of the repairs in the rental units. The family will also use 15,000 dollars every year for marketing purposes to communicate the availability of rental units to the target market. The family will also spend 2,000 shillings in the administration of the rental units.
Income Statement for the Rental Property
Cash Flow Statement
Cost Benefit Analysis
Implications of the Financial Analyses
My father thought of developing one of the properties he inherited and turning it into a rental property. At a cost of 2583000 dollars, 250000 dollars of which was a loan from a financial institution was used to transform the property into a rental property with forty units. The income statements show that the family will make a substantial income in each of the years as seen by the net income. The cash flow statements also show that the rental unit is projected to be sufficiently liquid throughout the five-year period. In addition to these analyzes, the decision as whether to go ahead with the investment is predicted by the cost-benefit analysis. The result shows that there are enough benefits from the venture to compensate the costs that will be incurred in developing and administrating over the rental proper. It is feasible for the family to invest in the property.
Risk Considered
The financial analysis shows that it is feasible to use the financing from the institution to develop the rental property, remain liquid over the entire five-year period, and generate enough income to pay off the loan and make substantial savings. However, there are some risks to be considered. Firstly, the financial analysis is predicated on each unit bringing in 800 dollars a month for a total annual income of 384000. These figures could be affected by the vacancy rates that show that 1.6% of the properties were vacant in the first quarter of the year (Realtytrac Staff, 2016). Although this was a significant decrease from the 9.3% from the third quarter of the previous year, volatility in the market could affect the vacancy rates, and by extension the income generation.
The financials are also predicted on the willingness of the prospective occupants to pay the reserved rent of 800 dollars a month. As highlighted by Sommer, Sullivan & Verbrugge (2011) the assets markets has resulted in an increase in the rent charged for residential and rental properties to recover the investments made. However, they prospective occupants might not be willing to meet the rental requirements. Any reductions in the rent charged will affect the financials negatively.
References
Bungert, M. (2003). Termination of Price Wars: A Signaling Approach. Wiesbaden: Deutscher Universitätsverlag.
McCleskey, S. (2010). When free markets fail: Saving the market when it can't save itself. Hoboken, N.J: John Wiley & Sons.
Realtytrac Staff. (2016). U.S. Residential Property Vacancy Rate Drops 9.3 Percent Between Q3 2015 and Q1 2016. Retrieved from http://www.realtytrac.com/news/foreclosure-trends/u- s-q1-2016-u-s-residential-property-vacancy-analysis/
Sommer, K., Sullivan, P. and Verbrugge R. (2011). Run-up in the House Price-Rent Ratio: How Much Can Be Explained by Fundamentals? Retrieved from http://www.bls.gov/ore/pdf/ec100090.pdf
