refer to the document of the assignment and the work completed refer assignment document and so part 4 of the document
QUESTION 1
Choose a property and estimate its cost:
The property that is chosen is a 3 bed 1 bath bungalow located in Stonewall Manitoba. The property carries 1100 square feet and a lot size of 50*100. This property features a double garage and fire pit in the back. The market cost of this house is $259,900. The income tax rate is 20%.
Assuming we put a 10% down payment on the home ($25,990), we are left owing $233,910. To cover the rest of the payment I will take out a mortgage on the home. The current mortgage rate at RBC is 2.44% on a 1-year fixed-rate amortized over 25 years.
Thus, monthly mortgage payment will be $1,039.16… =PMT(0.2%,300,-233910,0).
Calculate other purchase expenses
Closing costs such as legal fees and other one-time expenses arise from purchasing a home. While they vary from home to home, one should budget 3-4% of the purchase price of the home in their closing costs.
3.5% * $259,900 = $9096.5 in closing costs
Home inspection fee:
According to Bankrate, a home buyer should budget $300-$450 in their home inspection fee. So taking the average of the two we will budget $375.
Land survey fee:
According to rates.ca, the cost of land survey ranges from $1000 to $2000. Taking the average we can budget $1500 to our land survey fee.
Land transfer fee.
According to rate hub the land transfer tax of a property worth $259,900 in stonewall Manitoba is $2,918
Mortgage default insurance:
When you make a down payment of less than 20% you’re required to get mortgage default insurance. Since we only made a 10% down payment we will have to get this insurance. According to Ratehub, the mortgage default insurance of this property with a 10% down payment and an insurance premium of 3.10% is
Mortgage = 259,900 – (10%*259,900) = 233,910
Mortgage insurance = 233,910 * 3.10% = 7251.21
Title insurance:
According to Philips and Stevens, the title insurance cost is approximately $300 with some homes costing more and some costing less. We will budget for $300.
Salvage Value:
According to home guides, the average appreciation value increases 3.5-3.8% per year. It’s difficult to predict how much a home will appreciate based on supply and demand, and the potential of a recession that we saw in 2008. But barring any recession lets assume appreciation to be at 3.65% every year.
FV (5years) = 259,900 * (1.0365)^5 = $308,679.67 resale value of the home
Realtor fee (5% of sale of home) = $308,679.67*5% = $15,433.95
Legal fees = $1500
Moving expenses = $200
Total Salvage value = 308,679.67-15433.95-1500-200 = $291545.72
PV of the salvage value = 291545.72/1.0365^5 = $243,702.5862
Other Investments:
We will need to furnish the house so that customers will feel right at home when they are traveling. This will be an upfront fee for purchasing the furniture. According to Lazyboy, these are the costs associated with furnishing a home. We are taking the average from each.
1. 1. Living room - $2800-$7600 = $5200
2. Bedroom (3) - $2250-$9850 = $6050
3. Backyard/patio - $720-$4950 = $2835
Total Cost for furnishing the house = $14,085*(1.20) = 16902
PV of the Capital cost allowance:
The CCA rate that can be claimed on a rental property is 4% on the building. The income tax rate is 20%. The cost of capital for the project is the mortgage rate of 2.44% EAR. The salvage value at 5 years is $291545.72.
The CCA tax shield Is calculated as the following:
= abs ©*d*Tc*(1+k/2)/((d+k)*(1+k) – (S(5) *d*Tc/((d+k)*(1+k)*n))
=25,990*4%*20%*(1+2.44%/2)/(4%+2.44%)*(1+2.44%) – (291,545.72*4%*20%/((4%+2.44%)*(1+2.44%)*5))
=-3723.15
Question 2
1) Revenue
Similar AirBnB, with free parking on residency1
AirBnB Revenue: 40$/night x 3(bedrooms) x 365 nights = 43800$ in revenue per year, assuming all rooms are rented out every night.
PV 5-Year Revenue =
PV 5-Year Revenue = $196,921.98
Note: We lowered the price compared to our similar AirBnB, due to location.
2) Property Tax2 = $237/month x 12 months = $2,844 per year
PV 5-Year Property Tax =
PV 5-Year Property Tax = $12,786.44
3) Utilities (Water, Electricity, Heating, Internet)3 = $318/Month x 12 Months = $3,816
PV 5-Year Utilities =
PV 5-Year Utilities = $17,156.49
4) Maintenance & Repairs = $210/Month x 12 Months = $2,520
PV 5-Year Maintenance & Repairs =
PV 5-Year Maintenance & Repairs = $11,329.76
5) Cleaning & Other Amenities4 = $110/Month x 12 Months = $1,320
PV 5-Year Cleaning & Other Amenities =
PV 5-Year Cleaning & Other Amenities = $5,934.64
6) Services Fees = 40$/night * 0.03 * 365 = $438
PV 5-Year Service Fees =
PV 5-Year Service Fees = $1,969.22
Note: AirBnB charges a 3% service fee to all homeowners
1https://www.airbnb.ca/rooms/52621127?adults=1&check_in=2021-12-10&check_out=2021-12-11&previous_page_section_name=1000&federated_search_id=df977421-0c6d-40ea-b0b9-83f866e42f45&guests=1
2 https://wowa.ca/taxes/winnipeg-property-tax
3 https://www.expatistan.com/cost-of-living/winnipeg
4https://www.themoneyboy.com/airbnb-cleaning-fee-how-much-should-you-charge/
QUESTION 3
Calculate weighted average cost of capital (40 marks):
Chosen companies
Ryman Hospitality
Xenia Hotels and Resorts
Explain why the two firms you have chosen are useful comparables.
Ryman Hospitality Properties, Inc. (NYSE: RHP) is a leading lodging and hospitality real estate investment trust that specializes in upscale convention center resorts. The hospitality group was founded by Edward Gaylord. Prior to its public ownership, it was previously a subsidiary of Oklahoma City.
It’s an entertainment and REIT industry type as well as having a growing revenue of US$ 344 million.Xenia Hotels & Resorts, Inc. is a real estate investment trust that invests in hotels. As of December 31, 2019, it owned 39 hotels comprising 11,245 rooms. It’s a public company, with a revenue of US 1.149 B (2019).
Calculate amount of debt: For the 2 comparables, calculate the total long-term debt the firms hold.
Updated time Market Value (USD)
Ryman Hospitality Properties Inc. (U.S.) 12/31/2020 $27.65B
Xenia Hotels & Resorts Inc. (U.S.) 12/31/2020 $13.99B
Calculate the market capitalization of equity for the 2 comparables.
Market Capitalization (USD)
Ryman Hospitality Properties Inc. (U.S.) $51.34B
Xenia Hotels & Resorts Inc. (U.S.) $20.10B
Calculate cost of equity: Find the following information to determine the cost of equity for the 2 comparables using the dividend discount model and the CAPM beta.
Dividend discount model
CAPM Model
Levered stock beta
Ryman : βRyman = 1.966
Xenia : βXenia = 1.714
Expected return on market
R(mkt) = 8.432%
Risk free rate
Rf = 1.509%
Cost of Equity = Risk-Free Rate of Return + Beta × (Market Rate of Return – Risk-Free Rate of Return)
Ryman :
= 1.509% + 1.966 x (8.432% - 1.509%) = 15.12%
Xenia :
= 1.509% + 1.714 x (8.432% - 1.509%) = 13.38%
Average the cost of equity from the dividend discount model and CAPM model cost of equities for your analysis
Calculate cost of debt: Find the cost of an appropriate mortgage.
-TD Bank : 5 year fixed rate = 2.862%
Retrieved from TD bank
Mortgages Rates - TD Canada Trust
Use the information from a-d above to calculate the WACC for your AirBnB.
References:
Resources:
Listing of house
- https://mckillop.ca/properties/all-properties/309-4th-street-east
Mortgage rate at RBC
- https://wowa.ca/banks/rbc-royal-bank-of-canada-mortgage-rates
Home inspection fee:
- https://www.bankrate.com/real-estate/how-much-does-home-inspection-cost/
Salvage value
- https://www.sunlife.ca/en/tools-and-resources/money-and-finances/help-for-homeowners/how-much-does-it-cost-to-sell-your-home/
- https://homeguides.sfgate.com/much-homes-increase-value-10-years-100948.html
CCA rate:
- http://www.thebluntbeancounter.com/2015/11/should-you-claim-capital-cost-allowance.html#:~:text=When%20someone%20purchases%20a%20residential,the%20CCA%20may%20be%20claimed.
