TEAM PROJECT ENGINEERING ECONOMY TOPIC a REAL ESTATE PROJECT

  HO CHI MINH UNIVERSITY OF TECHNOLOGY OFFICE FOR INTERNATIONAL STUDY PROGRAMS FACULTY OF MECHANICAL ENGINEERING DEPARTMENT OF INDUSTRIAL SYSTEM ENGINEERING   ···☼··· TEAM PROJECT ENGINEERING ECONOMY TOPIC: A REAL ESTATE PROJECT CLASS CC01 – TEAM PASSIO - SEMESTER 221 SUBMISSION DATE: Instructors: Assoc Prof Dr Le Quynh Ngoc Lam Students’ name Students’ ID Phan Van Bach 2052865 Huynh Nguyen Khang Thinh 2053457 Trinh Minh Khoa 2052546  Nguyen Dinh Quoc Dat 2052233 Lam Hien Dang Khoa 2053130  HCM city, December 2022   ABSTRACT We’ve analyzed a real estate project based on real data, consulted from real estate agents; and from that, we provide the outcomes of different approaches These approaches are considered as independent projects, so it needs to be compared with a nothing approach From the analysis, we can conclude which approach is the most suitable for the investor’s condition, and also the best overall approach Time is the main comparison tool we use to compare these approaches, and the money flow will be calculated using knowledge from the Engineering Economics course There are approaches in total: one in which the investor funds the project all by his money, one in which he makes a loan from the bank, the rest are the ways he uses the money, plus the nothing approach When we find out the break-even point and the point where the independent approach surpasses the nothing approach, there are some interesting findings: the approach with the soonest break-even point doesn’t mean it will surpass the nothing project the fastest But eventually, every approach will surpass the nothing approach at a certain point The article focuses on our project and is divided into chapters: Chapter 1: Introduction Chapter 2: Theory fundamental Chapter 3: Project Analysis Chapter 4: Conclusion   THANK YOU During the study period this semester, our group has received a lot of help from our lecturer Assoc Prof Dr Le Ngoc Quynh Lam, as well as Assistant Lecturer Nguyen Duc Duy Without those help, our team would not be able to complete the report as it is now Our team would like to send our sincere thanks to you for imparting your valuable knowledge with our enthusiasm during our  study At the same time, we would also like to thank Assistant Lecturer   Nguyen Duc Duy for being extremely enthusiastic in guiding our group to complete this report through each class session as well as talks and discussions Without the teachers' help, our group would not have been able to complete the report Ho Chi Minh city, …………………………………   Best regards   TABLE OF CONTENTS ABSTRACT i THANK YOU ii LIST OF IMAGES iii LIST OF TABLES .iv CHAPTER 1: INTRODUCTION .1 1.1 The aim of the project 1.2 Data collection and project’s range 1.3 Project's Contribution CHAPTER 2: THEORY FUNDAMENTAL 2.1 Future Worth (FW) 2.2 Effective annual interest rates 2.3 Bank interest rate .5 2.4 Bank interest rate when lending CHAPTER 3: PROJECT ANALYSIS 3.1 The investor funds the project all by his money 3.2 The investor funds the project all by his money, but the land is renting 3.3 The investor make a loan from the bank, then buying the land and building the house 11 3.4 The investor nothing and put his money into the bank for compound interest 18   3.4.1 Do nothing (DN) compared to option .20 3.4.2 Do nothing compared to option 20 3.4.3 Do nothing compared to option 3a .21 3.4.4 Do nothing compared to option 3b 21 CHAPTER 4: CONCLUSION 22 REFERENCES 23   LIST OF IMAGES Figure The cash flow of scenario Figure The years it takes to meet the break-even point for option .8 Figure Money gain calculated using Excel function .9 Figure Cash flow for the second scenario, when the investor rents the land rather than buying it 10 Figure The simplified cash flow for option .10 Figure The break-even point of scenario The unit of money is in million VND.11 Figure Cash flow for the 3a scenario, where the investor has installment payment each year 12 Figure The cash flow for paying the loan The unit of money is in million VND 13 Figure 9. Next year debt calculation using excel function 13 Figure 10. Profit calculation using Excel’s function 14 Figure 11 Cash flow for the 3b scenario, where the investor pays all the loan at once 16 Figure 12 The cash flow for paying the debt and regaining the investment The unit of money is in million VND 16 Figure 13. Net income calculation using Excel’s function .17 Figure 14 Debt calculated with Excel function 17 Figure 15 Profit calculation using Excel’s functions for option 3b 17 Figure 16. Next year profit for option 3b after paying the debt 18 Figure 17 Do nothing option calculation formula 19 Figure 18 Do Nothing option with its money gain from years to years 19 Figure 19 Money gain comparison between option and DN option .20 Figure 20 Money gain comparison between option and DN option .20 Figure 21 Money gain comparison between option 3a and DN option 21   Figure 22 Money gain comparison between option 3b and DN option 21 LIST OF TABLES Table Summary of the project data Table Single-payment compound amount Table Summary of the approaches .7 Table Summary of the option input data Table Summary of the data of option Table Summary of the option 3a data 12 Table Summary of the option 3b data 15 Table Summary of the option data .18   CHAPTER 1: INTRODUCTION In Vietnam, real estate has been a great way for its people to business and  become wealthy or   a way to maintain finance when they retire Years went by, the  price of lands have increased so high that it is hard to make a decision, thus one false step can lead to bankruptcy for a small investor Even large real estate companies face difficulties when calculating the best options for their investments To be successful in real estate, there are many different factors to be considered; and a great start to it is calculating the right option, right amount of investment, loan, making a suitable decision, etc By applying Engineering Economics (EE) into a real estate project, one can understand the possible outcomes and select the most suitable approach for their   plan and capabilities 1.1 The aim of the project The project aims to provide different approaches for one to choose depending on his/ her initial balance, or their initial investment amount For instance, one can spend all his money to buy the land and build the house, or spend his money to rent the land and build the house, or make a bank loan then rent the land and build the house, etc The project also determines if the option is feasible based on the number of years it will take to gain back the money without inflation, assuming everything (the law, the market, the policy status, ) works in a perfect condition Each of these projects is an independent project, so the result of each project will be compared only to the nothing (DN) project 1.2 Data collection and project’s range Type of Data Initial Data value -1,000,000,000 VND for the Properties/ Description Funded by the investor’s own   investment house money or made loan from the  bank Money gain +21,000,000 VND a month Starts from month   +10% per years Comes from the customers Is the green cash flow arrows Money lost  per month -5,000,000 VND a month   +10% per years If the investor rents the land rather than buys it Only happens in option Maximum loan from the  bank 900,000,000 VND   +9% a year Compounding month  period (CP) The first CP always starts at month Effective interest rate of the loan that the bank charges Compounding period =  payment period Table Summary of the project data These following data are the data for the initial house building cost, the land  price and the initial renting price of the house (income) These data are consulted from a real work-in-process project and experienced real estate agents The project takes  place in Di An ward, Binh Duong province, Di An city Di An city, especially Binh Duong province, is where the sewing industry, wood industry, electronic industry, etc are located Therefore, most of the people who live here are labor workers Choosing an appropriate type of building is crucial for the  project to succeed, as there are customers only when they are provided the right demand A fancy villa won’t be so appealing if it is abandoned, and an investor won’t  be happy if his investment fails Hence, the most suitable choice for a project here is to build a four-level house motel We have chosen the size of the project based on real price consulted from real estate agents: For the land, it will be a 10x30 meter, with the former being the width Each square meter of this land costs 10,000,000 (10 million) VND; so the total cost to buy the whole land is 3,000,000,000 (3 billion) VND The cost to rent a 10x30 square   meter land is 5,000,000 (5 million) VND a month It is surprisingly cheap, but also not surprising because Di An is an industrial land The cost to build the house (motel) is estimated and rounded to be about 1,000,000,000 (1 billion) VND and it takes months to complete For the layouts, there will be 14 rooms, with each room is 16 meter square (4x4 meter) Normally the renting price for the first rooms, which we call them “kiosk”, is higher than the rest; however, for easier calculation, we will take the average only Therefore, the renting  price for room equals 1,500,000 (1,5 million) VND The salvage value is not considered in this project After the house is built, it is determined to cost the customers a total of  21,000,000 VND to rent all of the rooms The customer will pay their rent at the end of each month (starting from the 4th month) We’ll assume all rooms will be rented for easier calculation, and each years the renting price will be raised by 10% We’ll also assume that the payment period (PP) is equal to the compounding period (CP), as the monthly revenue will be put in the bank each month with automatically renewed  principal and interest Let’s assume one more that he chooses Agribank to invest his money on, he’ll have an effective interest rate of 4.9% annually when compounded monthly Lastly, when deciding to make a loan from the bank for a real estate project, it is advised to only borrow up to a max of 30% of the land cost, which is 900,000,000 (900 million) VND Any higher loan will make the project unprofitable, or the investor will take very long to regain the investment Because the monthly income is compounded monthly, so we need to calculate the bank effective interest rate from its annual effective interest rate: Monthly effective interest rate i% = (1+0.049)1/12 -1 = 0.00399 = 0.4% a month From these data, we will continue to calculate different approaches to find the result of each one   For the first year, n = explains the time it takes to build the house and then wait for customers to pay their rent at the end of the month After the first year, n will always equal 12 Figure Money gain calculated using Excel function The money gain is calculated with the excel function: FV(rate, n, A, present value) and we add the minus sign so that the money is a positive value In conclusion for scenario 1, the project is highly feasible as it only requires 12 years to regain the money invested A very good real estate project takes around 10 years to regain the investment, 15 years is normal and 20 years is very slow 3.2 The investor funds the project all by his money, but the land is renting Type of Data Data value Properties/ Description Initial investment -3,000,000,000 VND for the land Funded by the investor’s own -1,000,000,000 VND for the money or made loan from the house  bank Money gain +21,000,000 VND a month Starts from month   +10% per years Comes from the customers Is the green cash flow arrows Money lost  per month -5,000,000 VND a month   +10% per years If the investor rents the land rather than buys it Only happens in option Compounding month with i = 0.004  period (CP) The first CP always starts at month Compounding period =  payment period Table Summary of the data of option 17   Figure Cash flow for the second scenario, when the investor rents the land rather than buying it In this option, the investor chooses to build the motel on the rented land rather  than owning the land forever This option is the most suitable for investors who don’t want to pay a lot of money or lack capital for the start of the project The renting cost of the land cost 5,000,000 (5 million) VND a month, and it increases by 10% each years The only large investment he has to make at the start is the cost of building the motel, which is 1,000,000,000 (1 billion) VND Because the land renting cost (money loss) is cheaper than the motel renting price (money gain), so each month the investor  gains profit Figure The simplified cash flow for option 18   The money gain of the cash flow is just like in scenario 1, so we take the  previous calculated method to continue calculating in this scenario However, there is some difference now Figure The break-even point of scenario The unit of money is in million VND To meet the break-even point, the total profit must equal or exceed 1.020 billion VND This is because the house/ motel cost is billion VND and the land renting cost is still charging from the start to month to a total of 20 million VND As can be seen in the figure, at year 5, the investor is able to regain the investment 3.3 The investor make a loan from the bank, then buying the land and building the house a Installment payment each year Type of Data Data value Properties/ Description Initial investment -3,000,000,000 VND for the land Funded by the investor’s own -1,000,000,000 VND for the money or made loan from the house  bank Money gain +21,000,000 VND a month Starts from month   +10% per years Comes from the customers Is the green cash flow arrows Maximum loan from the  bank 900,000,000 VND   +9% a year based on the residual debt Effective interest rate of the loan that the bank charges 19   Compounding month with i = 0.004  period (CP) The first CP always starts at month Compounding period =  payment period Table Summary of the option 3a data Figure Cash flow for the 3a scenario, where the investor has installment payment each year In this option, the investor will not fund the project all by his money; instead, he will make a loan from the bank The bank willingly lends their money, however, only to a percent of the project For short-term projects, the investor can borrow up to 100% of what he needs; but for long-term projects, the bank only allows him to  borrow up to 70% of the project, according to Agribank Most importantly, as a real estate investor, he knows that he should not have a debt over 30% of the value of the land, if he ever wanted to regain the money invested This means that he can only make a loan maximum of 900,000,000 (900 million) VND Furthermore, the bank will charge an effective interest rate of 9% a year, and  payment will be made at the end of each year For this reason, we will calculate the money gain using the future worth method but it resets each year until the debt is paid 20   Figure The cash flow for paying the loan The unit of money is in million VND Here in the table we have important columns: year, debt, profit, monthly income, number of monthly income periods and annual income Monthly income and number of income periods are calculated as in scenario 1, where in the first year we have to minus months of house-building and month of waiting for the customers to  pay their rent at the end of the fourth month Annual income is calculated using the formula F=A*(F/A, i, n) or FV(rate, nper, pmt, [pv], [type]) in Excel We calculate annual income because the money accumulated each year is lost after paying the debt annually The debt is calculated as the remainder after the investor has returned an amount of the loan each year, plus its effective interest rate of 9%: Figure 9. Next year debt calculation using excel function  Next-year debt =  Debt n   = ( Debt n- Annual Incomen) × (1+0.09) +1 21    Notice that: the ( Debt n- Annual Incomen) × (0.09) is described in the figure as the small red arrows (*) This means that when the debt goes below zero, the investor has succeeded in  paying the debt From the table above, we see that the debt at year is below zero, which means that the investor completes his bank loan payment Then he will move to the second phase that is to regain the money he funds the project (3.1 billion VND) In the second phase, he needs to gain back 3,100,000,000 (3.1 billion) VND (because the project cost billion in total and he made 0.9 billion loan) Figure 10. Profit calculation using Excel’s function In year 6, the debt is paid so we take the absolute value of the debt and add the annual income to transform it into profit The profit of year calculated by:    Profit  year  = Abs(-95.59) +283.38 = 378.97 Then, the profit of the next years is calculated using the future worth method, as the money starts to stack again: For example, to calculate the profit of year & 8: 22    Profit next year  = Profit year = -FV (rate, n,  Aof that year ,  pv pvis the profitof last year) = - FV(0.004, 12, 25.41, 378.97) = 709.28  Profit next year= Profit year = -FV (rate, n,  Aof that year ,  pv pvis the profitof last year) = - FV(0.004, 12, 25.41, 709.28) = 1,055.81 From year 7, we not need to consider the annual income of the table When this money is greater than or equal to 3.1 billion VND, the investor will meet his break-even point, which is at year 13 (3,229.25 billion VND) As mentioned above, 13 years to regain the investment is considered normal speed for a real estate  project b Paying all the loan at once Type of Data Data value Properties/ Description Initial investment -3,000,000,000 VND for the land Funded by the investor’s own -1,000,000,000 VND for the money or made loan from the house  bank Money gain +21,000,000 VND a month Starts from month   +10% per years Comes from the customers Is the green cash flow arrows Maximum loan from the  bank 900,000,000 VND   +9% a year Effective interest rate of the loan that the bank charges Compounding month with i = 0.004  period (CP) The first CP always starts at month Compounding period =  payment period Table Summary of the option 3b data 23   Figure 11 Cash flow for the 3b scenario, where the investor pays all the loan at once In this scenario, the investor wants to repay all his debt at one point rather than  paying a specific amount each year Figure 12 The cash flow for paying the debt and regaining the investment The unit of money is in million VND Here in the table we have important columns: year, debt, profit, monthly income, number of monthly income periods, annual income and net income The net income is calculated just like in option money gain 24   Figure 13. Net income calculation using Excel’s function Because the debt is not paid annually, it keeps stacking with the interest rate of  9% per year From that point the debt is calculated as: Figure 14 Debt calculated with Excel function  Debt n +1= Debt n ×( + 0.09) When the money gain using option approach surpasses the debt, the investor  will be able to gain profit, which is in year 25   Figure 15 Profit calculation using Excel’s functions for option 3b Hence, the profit in year is 1718 - 1509 + 338 = 547 (million VND) This means that the future worth has just been resetted The next year profit, year 7, starts the future worth again with the present value of year 7: Figure 16. Next year profit for option 3b after paying the debt Year profit = -FV(0.004, 12, 25.41, 547.47) = 886.05 Later years are also calculated like year 8, with adjusted A and pv After paying the debt, he needs to gain the remaining 3.1 billion investment to meet the break-even point Surprisingly, with this single-pay debt approach, the money gained in year 14 is 3,538 million VND, which means that he meets the breakeven point at the same year with the previous approach (Annual Payment) 3.4 The investor nothing and put his money into the bank for compound interest Type of Data Data value Properties/ Description Initial investment 4,000,000,000 VND into the The money is stacking from  bank, compounded monthly year to year month with i = 0.004 Compounding period = Compounding  period (CP)  payment period Table Summary of the option data 26   In this last scenario, the investor will invest into nothing; instead, he will put his money into the bank for compound interest The money he put in will be equal to the money that he invests in the project, which means billion VND Then, we will see if  this approach can gain more profit than the previous approaches The compounding period will be one month, thus the money he have the next year will be: Total money year n 12 +1 = Total money year n × ( + 0.004 ) or -FV(i, n, A, pv) with i = 0.004, n = years × 12 months, A = 0, pv = 4000 (million VND) Figure 17 Do nothing option calculation formula From that we have the following data: Figure 18 Do Nothing option with its money gain from years to years  Now we will compare with each option from previous approaches: 27   3.4.1 Do nothing (DN) compared to option Figure 19 Money gain comparison between option and DN option As can be seen in the figure above, the option 1, in which the investor funds the  project all by his money, is inferior to the DN option until year 20 This can be explained by the high interest rate, because there are some volatilities in the economy so that the banks have to raise the interest rate 3.4.2 Do nothing compared to option Figure 20 Money gain comparison between option and DN option In comparison with option 2, the DN option is superior until year 28 This can be considered slow for option 2, quite surprisingly when option is the fastest option to meet the break-even point 28   3.4.3 Do nothing compared to option 3a Figure 21 Money gain comparison between option 3a and DN option Because the investor has to pay a high interest rate for the loan, it is not surprising that it will take him 26 years to surpass the DN option However, this option surpasses the DN option faster than option - the option that meets the breakeven point the soonest 3.4.4 Do nothing compared to option 3b Figure 22 Money gain comparison between option 3b and DN option In this option 3b, where the investor pays all the debt at once, the result is quite the same as option 3a versus DN option owever, we can anticipate that this option will be longer to surpass the DN option 29   CHAPTER 4: CONCLUSION In real life, the real estate project can be a lot more complex, with changing interest rates, maintenance costs, late rent payment or missing customers, etc and even pandemics However, in this simplified analysis, we can see there are many critical and interesting points The investor can determine how his plan will go based on these approaches, then choose the most suitable option If he wants to regain the investment soon, he can choose either option or option Or if he is in need of money, he can either choose option or option The interesting thing here is that even though option requires the least years to meet the break-even point, option requires the least years to surpass the DN option Overall, the best option might be option 1, where the investor owns the land and the house using his own fund; or DN option, as the interest rate right now is above the sky 30   REFERENCES Studocu, Present, Future and Annual Worth Analysis, access: https://www.studocu.com/en-us/document/umm-al-qura-university/engineeringeconomy/lecture-3-present-future-and-annual-worth-analysis-uqu/9332172   Nguyen Van Duong lawyer, What is interest rate? Types of interest rates and  factors affecting interest rates, access: https://luatduonggia.vn/lai-suat-la-gi-cac- loai-lai-suat-va-cac-yeu-to-anh-huong-den-lai-suat/   Leland Blank, P.E and Anthony Tarquin, P.E, “ Engineering Economy”, edition, McGraw Hill, 2018 Agribank website, access: https://www.agribank.com.vn/   31 th ...  ABSTRACT We’ve analyzed a real estate project based on real data, consulted from real estate agents; and from that, we provide the outcomes of different approaches These approaches are considered... interest rates, access: https://luatduonggia.vn/lai-suat-la-gi-cac- loai-lai-suat-va-cac-yeu-to-anh-huong-den-lai-suat/   Leland Blank, P.E and Anthony Tarquin, P.E, “? ?Engineering Economy? ??, edition,... lands have increased so high that it is hard to make a decision, thus one false step can lead to bankruptcy for a small investor Even large real estate companies face difficulties when calculating