Return on Investment
Return on investment refers to a sort of performance measure normally used to investigate or evaluate how efficient an investment is, compared to other potential investments. In order to successfully evaluate the return of an investment, also referred to as ROI; the benefit or return, normally calculated as the difference between the gain from investment and the cost of investment, is divided by the cost of investment. The gain from investment essentially refers to the proceeds that may be obtained from selling the investment. Alternatively, it can also be calculated simply as the amount of value gained, divided by the cost of the investment. ROI is a very popular metric in part due to its simplicity, as well as its versatility and the fact that it allows for the incorporation of factors such as inflation and recognizes the concept of the time value of money. At face value, ROI allows for an individual to objectively select amongst a collection of investment opportunities, simply on the value of the investment’s ROI, the higher the ROI, the better the investment.
Question 1: Perth Suburbs
First go to www.reiwa.com.au and select the suburb you live in, then you can find all the information from there on. Get the prices of a 4 bedroom house from 2009 – 2013 then get the monthly rents and then find out the annual return on the investment and the required rate of return RRR.
Median House Prices for Perth
2009: 1st Quarter $450,000, 2nd Quarter $475,000, 3rd Quarter $490,000, 4th Quarter $500,000.
2010: 1st Quarter $505,000, 2nd Quarter $500,000, 3rd Quarter $490,000, 4th Quarter $490,000
2011: 1st Quarter $485,000, 2nd Quarter $479,900, 3rd Quarter $460,000, 4th Quarter $470,000
2012: 1st Quarter $474,000, 2nd Quarter $480,000, 3rd Quarter $475,000, 4th Quarter $500,000
2013: 1st Quarter $795,000
House Rent
2009: 1st Quarter $850, 2nd $685, 3rd $660, 4th $700
2010: 1st Quarter $600, 2nd $750, 3rd 580, 4th $550
2011: 1st Quarter $860, 2nd $800, 3rd $673, 4th $420
2012: 1st Quarter $550, 3rd $770
2013: 1st Quarter $900
Return on Investment
2009
Investment =Stamp duty + Initial median house price for the year
Initial Median House Price= 450000
Stamp duty = 17,165
Simple ROI = (850*3)+(685*3)+(660*3)+(700*3)+(500,000-450000)/467,165= 2550+2055+1980+2100+50,000/467165 = 0.12356*100=
= 12.56%
2010
ROI = 1800+2250+1740+1650-15000/523432 = -0.0144*100 = -1.44%
= -1.44%
2011
ROI = 2580 + 2400 + 2019 + 1260 – 15000/502462 = -0.0134*100 = -1.34%
= -1.34%
2012
ROI = 3300+4620+26000/490,940 = 0.0691*100
= 6.9%
2013
First Quarter
Assuming the price of the house at the beginning of the year is the same as at the end of 2012 ($500,000). Capital gain =$295,000
ROI= 2700+295,000/518175= 0.575*100 =
57.5%
Question 2: David Jones
Shares (pick a company with the beginning of YOUR last name, my last name is De Mel so I picked David Jones, and then look at their share price history. You can find a company with the first letter of your last name from www.asx.com. Then find their share prices and their dividends from 2009 – 2013 to calculate how much return you would get from the shares.
2009
Initial share price (Investment Jan 2009) 3.18
Closing Share price (Dec 2009) 5.75
Total Dividends = 0.28
ROI = 0.28+2.57/3.18 = 0.896*100
= 89.6%
2010
Initial Share Price 5.38
Closing Share Price 4.40
Total Dividends = 0.30
ROI = 0.30 + -0.98/5.38 = -0.126*100
= -12.6%
2011
Initial share price 4.46
Closing share price 2.89
Dividends 0.28
ROI = 0.28 + -1.57/4.46 = -0.289*100
= -28.9%
2012
Initial share price 2.37
Closing share price 2.49
Dividends 0.175
ROI = 0.175 + 0.12/2.37 = 0.1245*100
= 12.45%
2013
Initial share price 2.36
Share price as at 1st May 2.96
Dividends 0.10
ROI = 0.10+ 0.6/2.36 = 0.2966 *100
= 29.7%
Analysis
A look at the results indicate that although investment in a suburb house is riskier venture, in terms of the amounts involved, it carries less risk if looked at in percentages. When one looks at the value of the initial investment compared to its value at the end of every year (capital gain), the figures for housing look much better. Further, the ROI for the house in the suburbs are better and more dependable. The value of the house in 2009 was $450,000, while the value for a share was 3.18, in 2013, the value of the house rises to $795,000, while that of a share actually drops to 2.96. Whereas the house has jumped by a significant 76%, while that of a share has dropped by 6.9%. Overall, investing in a house in Perth would be the best choice between the two.
Reflection
From the analysis it is clear than investing in real estate is much better way of obtain cash flow as well as capital gains. Further, the exercise proves the notion that the bigger the investment, the better the returns. As such, investment in the real estate market not only seemed as a better investment in terms of the return on investment, but it also displayed a better level of stability than shares. The exercise also led to the realization of how essential and important calculations of ROI can be when deciding on which investments to make.
References
David Jones Limited. Retrieved from http://au.finance.yahoo.com/q/hp?s=DJS.AX&a=00&b=1&c=2009&d=04&e=11&f=2013&g=m
Perth Quarterly Price Charts. http://reiwa.com.au/Research/Pages/Perth-quarterly-market-charts.aspx
