Assessment Strategy Module 2 Investment...

Assessment Strategy

Module 2InvestmentStrategy(encompassing Sessions 7 to 18)

*Once you’ve successfully completed the assessment criteria of this trainingprogram you’ll receive a Certificate IV In Business (BSB40215) – A NationallyRecognised Qualification – issued by College of Education Services (C.E.S.)Provider No: 22487

Assessment Module 2

Investment Strategy(Sessions 7 to 18)

Introductory Explanation

BackgroundTo qualify for the statement of attainment, students must demonstrate that they meet the requiredstandard in the following nationally recognised competencies:

BSBSMB402 Plan small business finances

BSBWOR404 Develop work priorities

BSBWOR301 Organise personal work priorities and development

BSBRES401 Analyse and present research information

BSBREL401 Establish networks

BSBFIA402 Report on financial activity

BSBADM409 Coordinate business resources

BSBWHS401 Implement and monitor WHS policies, procedures and programs to meetlegislative requirements

BSBRSK401 Identify risk and apply risk management processes

FNSINC402 Develop and maintain in-depth knowledge of products and services used byan organisation or sector

Assessment modulesThere are six assessment modules that cover the following topics:

Module 1: Planning and Goal-Setting Sessions 1 to 6

Module 2: Investment Strategy Sessions 7 to 18

Module 3: Analysis, Buying and Financing Sessions 19 to 43

Module 4: Managing and Reporting on Property Sessions 44 to 57

Module 5: Investment Evaluation and Selling Sessions 58 to 65

Module 6: Occupational Health and Safety Session 66

Assessments can be submitted as the student progresses through the course, but the statementof attainment can only be issued when all six modules have been satisfactorily completed.

Copyright © 2016 PropertyInvesting.com. All rights reserved. These notes are to be read in conjunction with the disclaimers on Page iii.

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Reference material

The written course materials (i.e. 66 sessions) form the primary reference material from whichstudents derive their answers to the tasks contained in this assessment.

However, in demonstrating their understanding and proficiency of the competency, students areexpected to research further information and their findings to a variety of theoretical and practicalscenarios.

Purpose of assessment

The assessment tasks are designed to give the student the opportunity to provide evidence uponwhich an assessment can be made in respect to competence.

Students who are able to demonstrate competence across all six modules within 18 months ofenrolment will qualify to receive a nationally recognised Certificate IV in Business from Collegeof Education Services.

If the assessment tasks are not up to the required standard, feedback will be provided and thestudent will be invited to resubmit. There is no limit on the number of resubmissions.

Basis of assessment

Assessment for each module is presented in three parts, comprising:

1. Part One: Theory Training – answering a series of questions to demonstrate the abilityto accurately research, solve or apply theory to practical situations.

2. Part Two: Practical Training and Research Analysis – real or hypothetical scenarios asopportunities for students to demonstrate their ability to apply the appropriate theory toderive a solution to the scenario.

3. Part Three: Personal Application Questions – these are optional exercises students maycomplete to assist them to apply the course material to their own investment plans.

Completing the assessment

Students may print this assessment module out and then write answers in the spaces provided.

Alternatively, students may prefer to complete the questions using a word docu ment, which thencan then email. If you choose this option then there is no need to re-write the question. Instead,simply just note the module number and question number before writing your answer.

Note: for your convenience, if you prefer this option you can download a pre-formatted templateanswer form in Microsoft Word from the downloads area of the website.

You may decide to use spreadsheets to help with the calculations. If so, please label themthoroughly and attach them as evidence of your calculations.


Page 2-2Assessment Module 2Investment Strategy (Sessions 7 to 18)

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Completed assignments should be submitted to:

Via mail:

The Assessment OfficerPropertyInvesting.com Pty LtdPO Box 2193Blackburn South, Vic. 3130

Via email:

[email protected]

Completed assessments will not be returned to you as they must be retained on file for auditpurposes.

Privacy and confidentiality

Your answers will be treated in the strictest confidence.

PropertyInvesting.com will only send personally identifiable information about you to othercompanies or people when:

> We have your consent to share the information

> We need to share your information in order to provide the product or service you haverequested

> We need to send the information to companies that work on behalf ofPropertyInvesting.com to provide a product or service to you. (Unless we tell youdifferently, these companies do not have any right to use the personally identifiableinformation we provide to them beyond what is necessary to assist us.)

> We respond to a compulsory court order to comply with due legal process.

If you have any questions about the information you provide then please contact us.



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Assessor’s responsibility

When you have submitted your assessment, an appropriately qualified and experienced assessorwill review your answers to determine whether you are either ‘competent’ or ‘not yet competent’against agreed industry standards.

As mentioned, a person deemed ‘not yet competent’ against any standard can resubmit theiranswers and be reassessed. In these cases, students will be offered feedback and counselling toassist them to bring their standard up to the required level(s).

The assessor is not able to provide mentoring, advice, recommendations, or other services inrespect to applying the information to your specific situation. Furthermore, being classed ascompetent is not a guarantee to success in property investing, rather it is a reflection that youhave demonstrated the ability to appropriately meet the assessment guidelines for the relevantcompetency.

Please refer to the disclaimer included on page iii of the course materials for further information.

Contact information

If you have any questions then please contact us, either by:

Email:

[email protected]

Phone:

03 8892 3800 (business hours).

Mail:

The Assessment OfficerPropertyInvesting.com Pty LtdPO Box 2193Blackburn South, Vic. 3130



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Student declaration

Your answers need to be your own work, based on your personal study and/or research. You mustacknowledge all material and resources used in the presentation of this assessment whether theyare books, articles, reports, internet searched or any other document or personal communication.You must also certify that the assessment has not previously been submitted for assessment inany other subject or any other time in the same subject and that you have not copied in part orwhole or otherwise plagiarised the work of other learning and/or other persons. You will alsoneed to confirm that you will not cheat or plagiarise, or copy from another student during thecompletion of this assessment.

Instructions

Your assessment cannot be reviewed without a properly completed student declaration. Pleaseread, and if accurate, complete the form below. Write your name on the top line, then sign inblue or black pen on the signature line and date it accordingly. Print your name at the bottom.

Student DeclarationAssessment Module 2 – Investment Strategy (Sessions 7 to 18)

I,

declare the following statement to be true:

I hereby acknowledge that this submission is my own work, based on my personal studyand/or research. I have acknowledged sources and resources used in the preparation of mysubmission whether they are books, articles, reports, internet searches, or any otherdocument.

I also certify that the assessment has not previously been submitted for assessment in anyother subject, or at any other time in the same subject and that I have not copied in part orwhole or otherwise plagiarised the work of other students and/or other persons.

Signature: Date:

Print Your Full Name:



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Part One: Theory TrainingQ1. What are some of the potential financial and non-financial downsides for ignorantinvestors?

Q2. Referring to the diagram on –8, explain how an investor can use savings, capitalappreciation, cash flow and quick cash investing strategies to create an independent income.What determines how large this independent income can be?

[Attach a separate page if more room is needed]

Q3. Which Level of Investor best describes you at the moment? What are the likely futurefinancial consequences of remaining at this level once you no longer earn a salary or wage?



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Q4. Explain these terms [within the context of the Wheel of Wealth]:

Earned income

Quick growth

Passive income

Yield (as it applies to commercial property returns)

Q5. Explain what types of real estate investing strategies would be appropriate for investorsseeking quick cash returns.

Q6. Explain what types of real estate investing strategies might be appropriate for investorsseeking passive income.

Q7. Using the headings below, explain the differences between commercial and residentialproperty.

Who normally pays the outgoings

Length of the lease



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Annual rent adjustments

Cost of improvements

Q8. Explain how the Wheel of Wealth model adds clarity and specificity as to the right type ofproperty, and the right investment strategy, for an investor seeking to use real estate to createenough investment income to replace their salary or wage.

[Attach a separate page if more room is needed]

Q9. Using the headings below, explain for whom Monopoly Theory is better suited as aninvestment system.

Investment horizon

Approach to investing

Career/income earning ability



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Q10. Identify three dangers associated with quitting full-time employment to become a full-time investor.

1.

2.

3.

Q11. Name three options that may be available to create more time for investing withoutsuffering the full consequences you’ve identified in Q10.

1.

2.

3.

Q12. Identify five traits of properties that might make good investments under the MonopolyTheory system and explain why.

1.

2.



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3.

4.

5.

Q13. Fred is a plastic surgeon who enjoys his job and is well paid for it. However, he is also apassionate property investor who ultimately wants to have enough investment income to live alifestyle he has become accustomed to when he no longer wants to work as a surgeon. Whichapproach do you think Fred would be best suited to – Wheel of Wealth or Monopoly Theory?Explain your answer by illustrating the steps of your chosen model as Fred might apply themto earn before-tax investment income of $200,000 per annum.

[Attach an additional page if more room is needed]



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Q14. What is leverage?

Q15. Samantha is interested in purchasing an investment property for $200,000 and isweighing up whether or not to take out a loan for 80% of the purchase price, or to simply useher considerable savings to pay for it outright. Calculate the leveraged and unleveraged return(profit/loss ÷ cash contributed) based on the following scenarios: [include your calculations ifcompleting by hand, or else you may use a well labelled spreadsheet and attach it to yourassessment submission].

The property increases in value by 20%

The property decreases in value by 15%

Q16. Explain the following terms:

Negative gearing

Positive gearing

Depreciation

The property market



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Q17. Using the example of blocks of units built in the 1970s (that because of changes to theplanning code could not be rebuilt today) explain how scarcity drives value.

Q18. Provide a brief outline of the likely effect on the property market in the followingsituations. Demonstrate your answer by redrawing the relevant supply and/or demand curve toillustrate what is likely to happen to the property price (demand) and amount of property forsale (supply).

1. A new $20,000 government grant for first homebuyers

2. The abolition of negative gearing

Quantity

S

Q1

P1

Pric

e

D

Quantity

S

Q1

P1

Pric

e

D



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3. The removal of the 50% capital gains tax discount

Q19. Explain the tax incentive provided to investors who choose negative gearing. In youranswer quantify the tax offset a taxpayer who pays an average 30% tax rate would receive on a$10,000 ‘income’ loss and explain how the remainder of the loss may have to be funded.

Q20. It’s been said that positive gearing is a flawed investment strategy because it results inmore income tax being paid (because there is a profit), rather than less (as is the case withnegative gearing). If this is true, why would an investor favour positive gearing over negativegearing?

Quantity

S

Q1

P1

Pric

e

D



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Q21. Contrast the advantages and disadvantages of buying a new home as an investmentproperty as opposed to buying an older property.

Q22. Explain how each of the following variables are important considerations when decidingwhich property is ‘best’ for an investor.

Return

Passivity

Strategy

Cash reserves/borrowing ability

Price

Location

Housing profile



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Q23. What is a mixed-use commercial property? What emerging mixed-use property trend isunfolding in larger land-locked capital cities where populations are swelling? How is this anopportunity for forward-thinking investors?

Q24. Calculate the required financial information for the following scenarios? [include yourcalculations if completing by hand, or else you may use a well labelled spreadsheet and attachit to your assessment submission]

1. The gross percentage return (yield) on a commercial property for sale at $500,000 that iscurrently renting for $1,000 per week

2. The impact on the property’s value of a $50 per week rental increase (at the same yield asyou calculated in Question 1)

3. The impact on the property’s value if the dwelling was rezoned a higher density and theyield dropped to 5%



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Q25. Explain how an increase in value can lead to a decrease in yield, and a decrease in valuecan lead to an increase in yield.


Tenancy risk

Vacancy risk

Finance risk

Q27. Using your own simple example, explain what capital gains are and how they can beeroded by the impact of inflation.

Q28. Outline a brief strategy for how you might improve the ‘efficiency’ of an older 1950shouse on a corner ½ acre block of land and in doing so manufacture a capital gains return.



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Q29. What is the ripple effect? How can it be used to potentially identify areas that may beable to experience above-average market appreciation?

Q30. Using the illustration of depreciation, explain how ‘profit’ is different to ‘cash flow’.

Q31. Identify and explain the three possible ‘income’ outcomes from a rental property.

1.

2.

3.

Q32. Explain the relationship between perceived value and actual cost, and how therelationship can lead to a profit or loss on a renovation project.



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Q33. Why is gathering accurate information about the existence and cost of any structuralrepairs of utmost importance in a renovation project?

Q34. Using the 135% renovation formula (Page 15-8), calculate the following on a ‘renovationdelight’ property, currently for sale for $250,000 [include your calculations if completing byhand, or else you may use a well labelled spreadsheet and attach it to your assessmentsubmission].

1. The minimum sales price needed to achieve a profit

2. The renovation budget that would need to be adhered to

3. The allowance for ‘holding costs’ while the renovation was being completed


Subdivision

Development



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Setback

Covenant

Crossover

Q36. You have found a parcel of land that can be subdivided into two lots and are weighing upwhether to simply split the title and sell the land, or to go ahead and subdivide and build anew dwelling on each site.

The forecast profit on the subdivision is $100,000. The additional potential profit if thedwellings are built is a further $75,000.

Explain why might it be better to sell the subdivided land (i.e. project profit of $100,000)rather than going ahead and building on it (i.e. project profit of $175,000), if going ahead andbuilding is budgeted to provide a higher project profit (i.e an additional $75,000)?



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Q37. Building a property that is difficult to sell on completion is one of the larger risksassociated with property developing. Drawing from the discussion of the ‘6 Ps of property’,explain how researching what the customer wants can reduce this risk.

Q38. Which investment strategy ought to have the highest return: renovating, subdividing orproperty development? Give reasons for your answer.

Q39. How is vendor finance different from a traditional cash sale?



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Q40. Explain these terms as they pertain to the profit an investor can make from a vendorfinance sale:

Price margin

Interest margin

Q41. Using the example of a self-employed businessperson, explain how vendor finance mayassist them to enter the property market, if they so choose.

Q42. Explain these terms as they pertain to the lease option investment strategy:

Lease/right to occupy

(Call) option

Periodic rent

Option fee

Q43. How is vendor carry-back different to vendor finance?



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Q44. Name and briefly explain the four variables that need to be established when decidingthe basis of a vendor-carry back loan.

1.

2.

3.

Q45. Create a simple financial model (include dates) that explains how a simultaneoussettlement could result in a lump-sum profit for a creative investor [include your calculationsif completing by hand, or else you may use a well labelled spreadsheet and attach it to yourassessment submission].



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Q46. Since property prices in Australia have risen faster than rents (and yields have thereforefallen), finding positive cash flow properties (on a rental basis) is becoming harder and harder.While this is a challenge, explain how investors can acquire/increase their recurrentinvestment income (derived from their real estate investments) by adopting an active approachin each of the following strategies.

Rental (buy and hold)

Renovating

Subdividing

Developing

Vendor finance/lease option

Vendor carry-back



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Part Two: Practical Training and Research Assignments

Research Assignment #1

Requirement

Not all real estate investment strategies are relevant to every potential property investment. Inthis research assignment, you are required to find five properties that are currently for sale inan area of your choice, and to match those properties to what you think is the most suitableinvestment strategy.

In forming your answer, you need to explain your thinking about why the property wouldmake a good investment, and outline the variables (assumptions) that must exist in order for aprofit to be achieved. A guideline for the length of each answer is between 200 and 400 words.

Your choice of five properties must include at least three from the following list:

a) A generic growth property

b) A generic income (positive cash flow) property

c) A renovation

d) A subdivision

e) A development

Documentation

You will need to submit a print-out of the advertisement or other document that features theproperty you are using as a case study, as well as your explanation for your reasoning. Alsoinclude other information that you feel is relevant.

The properties selected must be for sale at the time of choosing them.



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Requirement

> Step One: Visit a home that is currently for sale in an area of your choice (for example,attend an open for inspection or arrange for your own private walk through). As you do,pay particular attention and make a list of at least 10 items in the house that could be‘renovated’.

> Step Two: Having identified the items, obtain ball-park quotes for renovating them. You are NOT required to obtain actual quotes from builders.

> Step Three: Make an assessment about which items you feel add more perceived valuethan actual cost, and which items add more cost than perceived value.

> Step Four: Assuming you pay the asking price on the property, use the 135% formulaoutlined on Page 15-9 to calculate budgets for:

a) Closing costs

b) Reno costs

c) Holding costs

d) Selling costs

e) Your expected profit

e) The sale price you would need to achieve to earn your profit.

> Step Five: Based on your findings above, form a conclusion about the potential validityof this property as an investment under the renovation strategy.

Documentation

As evidence of your research, submit the following information:

a) Information about the property you inspected (a web ad, brochure, etc.)

b) List of items that need renovating. Include photos if possible

c) Description of how you would renovate/improve those items

d) Cost estimation of the improvements

e) Calculations

f) Written conclusions including explanations for your reasoning.



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Background

Simon wants to sell his home for $400,000. Ben wants to buy it, but only has $20,000 for adeposit (plus enough cash to pay for the closing costs).

Requirement

> Part One: Based on the variables below, calculate the vendor carry-back instalmentsSimon would receive assuming he funds the shortfall between what Ben can pay (i.e. hisdeposit and traditional finance).

> Ben pays his maximum deposit

> Ben also pays the finance he qualifies for: 80% LVR from the XYZ Bank at 7%interest, with monthly repayments (in arrears) over 30 years

> Simon is willing to offer vendor carry-back but wants 10% interest and monthlypayments of the balance over five years, with the first payment upfront.

In your answer, explain at least two forms of security that Simon could ask for ascollateral for the vendor carry-back loan.

> Part Two: Based on the variables below, calculate the vendor finance instalments Simonwould receive assuming:

> Ben pays his maximum deposit

> Simon is willing to offer vendor finance over five years, but the sales price needs toincrease to $420,000. The interest would remain at 10% with monthly repayments inadvance

> In calculating the instalments, Simon is willing to base the monthly repayments over30 years, with a balloon payment at the end of five years

In your answer, explain how the Ben’s legal right of ownership differs depending onwhether he uses vendor carry back or vendor finance.

> Part Three: Calculate the total amount of the instalments Ben would have paid at theend of five years under Part One and Part Two. Also calculate the amount still owingunder both alternatives (i.e. at the end of five years).



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Part Three: Personal Application Questions

Task #1

Using the items listed below (which were outlined in Session 18), and applying them to yourcircumstances, create a logical argument for what would be the most suitable investmentstrategy for your next property investment purchase [word length – 500 to 1,000 words]:

1. Personal variables> Your access to time> Your access to money> Your passivity> Your skill /expertise/desire> Your risk profile

2. Desired profit outcome> Growth> Income

3. Profit type> Generic (market driven)> Manufactured

4. Financial variables> How much profit/annual income you want the investment to make> How much of your own money you want to use> How much money you want to borrow> When the profit is expected to be earned

5. Preferred strategy> No investment strategy seems relevant> Buy and hold (growth focus)> Buy and hold (positive cash flow)> Renovation> Subdivision> Development> Simultaneous settlement> Vendor finance> Lease option> Vendor carry-back> Combination of the above

Task #2

Explain how completing task 1 has provided increased clarity and focus with your investing.What uncertainties has it helped to answer?



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