Introduction

In this investigation, you will compare the returns and change in financial position for two commonly used investment strategies –

1. i) Investment in real estate through the purchase of property
2. ii) Investment in the stock market through the purchase of shares Typically both of these investments are considered moderate to long term investments (ie for periods of longer than 7 years). As with any

investment, there is a certain amount of risk and uncertainty – in this task you will see how the two different investment options may play out.

In this context, you have a budget of between $450 000 – $500 000, of which you will contribute $100 000 of your own savings, with the rest financed through borrowing.

Part One – The Proposal – Initial Research

Task 1A – Choose Your Investment Property (SR).

Your first investment option is in real estate. In this part, conduct some research on an investment

property and choose an investment property so that you can put forward a proposal to your teacher for

approval. You have a budget of between $450 000 and $500 000 (so when considering the extra costs

involved, you need to spend a little less than this).

➢ Choose a property within a 20km radius of Brisbane GPO with a “for sale” price between $450 000 and $480 000. (It must be 3 or 4 bedroom house OR 2 or 3 bedroom unit) – that has sold within the last 15 years (since August 2001).

➢ Take a screenshot of the advertisement for your property and also a screenshot of a map showing its position and the positions of key features near it (eg: schools, shops, trainstations).

➢ Justify your choice of investment property by giving three reasons why it is a suitable investment.

➢ Take a screen shot of the “sale history” for your chosen property (you will need this later)

➢ Find a suitable historical (5, 10 or 15 year) percentage growth for your chosen suburb. Take a screenshot and reference your source and include in your proposal.

Task 1B – Choose Your Shares (SR)

Your alternative investment option is buying shares listed with the Australian Stock Exchange (ASX). Investors typically spread their risk over various shares. With your $450 000, develop a share portfolio

from companies listed in the ASX 100 (the top 100 performing companies in Australia). See appendix A for a list of companies.

➢ Choose two share options such that:

(i) One company must be a financial company (eg banks, credit unions)

(ii) The second company is your choice, but it cannot be in the financial sector.

➢ Include screenshots of the purchase price of your shares.

➢ Supply screenshots of the 10 year charts of your chosen shares.

➢ Include this information to complete your proposal for teacher approval Submit your proposal using the forms provided. Do not proceed beyond this point unless your project has been approved by your teacher.

Part Two – Buying Your Investments

Task 2A – Calculating the Costs of Purchasing Real Estate (SR)

When purchasing real estate, there are a number of costs associated with the purchase, further to just the sale price of the property. Determine the cost of purchasing your chosen property. Ensure you address the following:

➢ Calculate the Stamp Duty payable on the purchase price of your property. (Use a suitable online calculator and provide a screen shot).

➢ Provide an estimate for the conveyancing (legal costs) for purchasing (use a suitable source).

Task 2B – Calculating the Costs of Purchasing Shares (SR)

When purchasing shares through the ASX, as well as the price of the shares, there is a fee to pay the person who manages the sale (the stockbroker).

Determine the total cost of purchasing your shares in each of the two sectors, and the number of shares

you buy in each company. You must spend at least $200 000 on each share type.

➢ Calculate the amount of shares for each company

➢ Calculate the brokerage on each sectors share transaction (refer to appendix for brokerage rates)

Summarise your calculations in a table like the one provided below:

Part Three – The First Year

Even though the investment in shares and real estate is generally a moderate to long term investment (+5 years), there are benefits to having both of these investments as they can generate income and provide tax deductions immediately.

Task 3 – Financing the Investment (SR)

Recall that you have to borrow the balance of your investment after you have put in your own $100 000.

Task 3a – Calculate your total costs for this loan over the first 12 month period (SNR)

➢ Calculate the monthly repayments.

➢ Determine the likely fees associated with such a loan over a 12 month period. Ensure you appropriately reference your source/s.

➢ Calculate the amount repaid in the first year.

➢ Calculate the balance of the loan after the first year.

Task 3b – Calculate your total costs for this loan (SNR).

➢ Calculate the cost of the loan after the first 10 years.

➢ Calculate the amount owing on the loan at the end of the first ten years.

➢ Calculate the total cost of the loan over 25 years if it was paid off fortnightly over that 25 year period.

PART 4 – THE FUTURE

Investments like real estate and stocks are often bought so that the benefits can be enjoyed in the medium to long term. After investing for ten (10) years, you make the decision to take your money out of your hypothetical investment so that you can use it elsewhere – part to reinvest, and the rest to enjoy!

Task 4A – Determine your profit or loss (CR – KAPS + MAPS).

Calculate an estimate of your overall profit or loss for your investment over ten years. Assume that your investment has been sold and it “settles” on the 30 June 2026.

In your response you should consider the following:

For the real estate option:

➢ A realistic growth rate for your suburb (justified accordingly)

➢ Use of exponential growth formula to calculate sale price

➢ Real estate agent commission of 2.3% plus GST

➢ Calculation of Capital Gains Tax

➢ Inclusion of all possible expenses related to the property

➢ Inclusions of all income generated by the property

For the stock option:

➢ A reasonable estimate of their worth based on historical data  and a mathematical model

➢ Calculation of brokerage for sale using a broker (use table in the appendix)

➢ Calculation of Capital Gains Tax

➢ Inclusion of all possible expenses related to the stock investment

➢ Inclusions of all income generated by the stocks

Task 4B – Decide on which investment option (CR‐ MAPS).

Decide on which investment option you would like to pursue in the long term. Justify your response with mathematical reasoning and by making informed decisions based on your calculations.

Task 4C – Reflect on the Effectiveness of Your Mathematical Model (CR – MAPS).

Reflect on the effectiveness of your model which was used to determine your final financial position. In this discussion, include the strengths and limitations associated with your model – were your methods a reasonable approximation of a real life context – why/why not?

General Requirements

▪ Your assignment is to be written in formal language. It should clearly demonstrate your understanding of the topic and the solutions you have provided.

▪ All resources should be references appropriately.

▪ You should read and adhere to the College Academic Integrity Policy.