Finance 1 Assignment?

[vcestudent94]

Is anyone else struggling to start this assignment? Here it is if anyone cares to point me in the right direction:

One of your closest friends has just won $220,000 in the Australian Powerball Lottery. Your
friend is considering buying an apartment and comes to you for advice. The friend has found
a three bedroom apartment in the CBD valued at $840,000 that she is considering buying.
She is a full time student and seeks your advice on how to finance the remaining she needs to
be able to buy the apartment. Her current rent is $800 per month that is covered by her part
time job. When you ask why she needs a three bedroom apartment, she replies that she is
planning to rent out the remaining two bedrooms to two of her fellow students.
Advise your friend:
1.
What are the risks and likely returns from the house purchase?
2.
Is it a good decision to make this purchase?
3.
What is the best way to finance the house?
4.
What are the costs and risks of the finance you recommend?

[Greatness]

I think you're struggling because they expect you to do your own research to find this information.
1. You should be able to identify these. Not being able to pay the mortgage, property prices tend to rise in the LR etc...
2. You would have to make some assumptions here, or use figures from a bank. Go to Commonwealth Bank's website and see what kind of mortgages they have available, the interest rate, is it floating or fixed? etc do an annuity calculation to see how much it is monthly and see if this person would be able to pay it. Assume how much rent the 2 other students will be paying. ... etc
3. Research this. Get a loan, what kind of loan etc
4. Well this depends on what you decide for Q3.

I think you're making this harder than what it is. You just have to do your research and make assumptions then draw conclusions! There will be no 'right' answer. Obviously some responses will be more valid than others, but the bulk of the marks will come from doing your own research then being able to explain it properly, do relevant calculations properly, discuss relevant theory and concepts then draw conclusions to give advice to your friend.

Good luck.

[vcestudent94]

In relation to number 3, I've calculated the rough annuity and it is well above what she can afford (around $4k a month at 6.54%), so I concluded that it is a stretch and it is not a good decision. How would I go about answering number 3 now? Is there even a way to finance this besides ripping off her tenants.

[Hancock]

From what I call tell from the online tutor, that is the best way to finance it. Remember that rental income is not guaranteed and that no bank will give a loan out with reliance on rental income.

[vcestudent94]

So the only way is to charge around $1600/month rent for each of her tenants Surely there must be a cheaper way.

[Hancock]

Since rental average in Melbourne CBD is 350 per week = 1400 / month so it's not too far off. 1400+1400+800 = 3600. It's a bogus assignment, no bank is going to lend her that amount of money (640,000 maximum) given that her guaranteed income is 800 per month. Ridiculous.

[vcestudent94]

Since rental average in Melbourne CBD is 350 per week = 1400 / month so it's not too far off. 1400+1400+800 = 3600. It's a bogus assignment, no bank is going to lend her that amount of money (640,000 maximum) given that her guaranteed income is 800 per month. Ridiculous.

Agreed. Just one more question: How about a "no fee variable rate", is the cheaper rate worth all the extras you miss out on?

[Hancock]

Thats for you to decide upon. I think it is, but you have to explain your own reasoning in the report.

[Hancock]

Holy shiz, I had my assignment at 1440 words and now I'm down to 903. 750 is so small.