We’ve analyzed a real estate project based on real data, consulted fromreal estate agents; and from that, we provide the outcomes of differentapproaches.. There are 5 approaches intotal:
INTRODUCTION
The aim of the project
This project offers multiple investment approaches tailored to varying initial budgets, such as purchasing land outright, renting land and constructing a house, or obtaining a bank loan to finance the project It assesses the feasibility of each option by calculating the payback period, considering a scenario without inflation and assuming ideal market, legal, and policy conditions Each investment strategy is analyzed independently, with results compared solely to a "do nothing" (DN) baseline to determine the most advantageous approach.
Data collection and project’s range
Type of Data Data value Properties/ Description
Initial -1,000,000,000 VND for the Funded by the investor’s own investment house money or made loan from the bank.
Is the green cash flow arrows.
If the investor rents the land rather than buys it.Only happens in option 2.
Maximum loan from the bank.
Effective interest rate of the loan that the bank charges.
The first CP always starts at month 4.
Table 1.Summary of the project data.
This article provides key data on the initial house building costs, land prices, and starting rental incomes, all sourced from a real-world project and experienced real estate agents The project is located in Di An Ward, Binh Duong Province, Di An City, offering valuable insights into the local real estate market.
Di An City in Binh Duong Province is a hub for industries such as sewing, wood, and electronics, attracting primarily labor workers Selecting the right type of building is essential for project success, as meeting customer demand ensures occupancy and profitability A luxurious villa may lose appeal if left unused, and investors are unlikely to be satisfied with failed investments Therefore, constructing a four-level house motel is the most practical and suitable solution for this area.
We have chosen the size of the project based on real price consulted from real estate agents:
The land measures 10x30 meters, with a width of 10 meters, and each square meter costs 10 million VND, making the total purchase price 3 billion VND Renting this 300-square-meter plot costs approximately 5 million VND per month, which is surprisingly affordable given its location This low rental rate is typical for industrial land in Di An, reflecting its commercial value and market demand.
The estimated cost to construct the motel is approximately 1 billion VND, with a completion timeframe of three months The facility will feature 14 rooms, each measuring 16 square meters (4x4 meters) While the first two rooms, referred to as “kiosks,” typically command higher rental prices, we will use an average rental rate for simplicity, setting it at 1.5 million VND per room The project does not account for salvage value in its financial considerations.
The total rental income from the house is estimated at 21,000,000 VND, with tenants paying monthly rent starting from the 4th month To simplify calculations, it’s assumed that all rooms are rented continuously, and the rental price increases by 10% every three years The payment period aligns with the compounding period, as monthly revenue is deposited into the bank with automatically renewed principal and interest If the owner invests the rental income in Agribank, they can expect an effective annual interest rate of 4.9% 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
To ensure the project's profitability, borrowing must not exceed 900 million VND, as higher loans would render the project unprofitable or significantly delay the investor’s return on investment Given that the monthly income is compounded monthly, it is essential to calculate the bank’s effective interest rate based on its annual effective interest rate to accurately assess borrowing costs and project viability.
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.
Project's Contribution
This project aims to assist real estate agents in selecting the most effective investment strategies, leveraging their high capabilities to navigate diverse options Di An, a promising land investment location, continues to attract numerous investors, making this analysis essential for strategic planning By providing insights into market opportunities, the project enables agents and investors to make well-informed decisions and maximize their returns in the thriving Di An real estate market.
THEORY FUNDAMENTAL
Future Worth (FW)
The primary goal of all time value of money methods is to maximize future wealth, making future worth (FW) a critical metric in capital investment decisions The FW of a series of cash flows represents its equivalent value at the end of year n, calculated at a specified interest rate, typically the Minimum Attractive Rate of Return (MARR) Understanding the future worth of a project allows investors to evaluate its potential profitability by comparing it to its present worth, enabling more informed and strategic investment decisions.
If FW (i = MARR) ≥ 0, then the project is economically justified
Effective annual interest rates
Effective annual interest rates are calculated based on the annual interest period, with the compounding period (CP) being any interval less than one year For instance, a nominal interest rate of 18% per year compounded quarterly is equivalent to an effective annual rate of approximately 19.252% Understanding how different compounding periods affect the effective interest rate is essential for accurate financial analysis and comparison.
To determine the effective annual interest rate (iₐ), equate the two expressions for F and solve for iₐ The formula for the effective annual interest rate is iₐ = (1 + i)ᵐ − 1, where i represents the nominal interest rate per year, and m denotes the number of compounding periods per year Understanding this relationship is essential for accurately converting nominal interest rates to their effective annual equivalents, ensuring precise financial calculations.
CP = time period for each compounding m = number of compounding periods per year i = effective interest rate per compounding period = r m i a = effective interest rate per year
Equation [4] calculates the effective annual interest rate i a for any number of compounding periods per year when i is the rate for one compounding period.
If the effective annual rate ia and compounding frequency m are known,Equation [4] can be solved for i to determine the effective interest rate per compounding period
Bank interest rate
Interest rate is the cost of borrowing capital expressed as a percentage, representing the price paid for the right to use a unit of borrowed funds over a specific period, such as one month or one year It is a unique price derived from the use value of a loan, which is measured by the profit it enables the borrower to generate through business activities or by satisfying certain needs Unlike commodity prices, interest rates are not expressed as absolute amounts but as a percentage, serving as the rate of return that the lender earns on the loan This concept highlights that interest is a reflection of the use value of borrowed capital rather than its intrinsic market value.
For commercial banks, these two interest rates form the main income and expenses of the bank:
Bank deposit interest rates refer to the interest paid by banks on customer deposits, varying based on factors such as deposit type (e.g., no-term accounts, savings), deposit term, and deposit amount These rates differ significantly depending on the specific conditions of the deposit, influencing the potential returns for depositors Understanding how interest rates fluctuate across different deposit options can help individuals choose the most advantageous savings plan.
Bank credit interest rates refer to the amount borrowers pay to the bank for loans, varying based on loan types such as commercial, installment, or credit card loans These rates are influenced by the relationship between the bank and the customer, as well as specific agreement terms between the two parties.
Bank interest rate when lending
Bank loan interest refers to the percentage charged on the loan amount, typically calculated annually While banks regulate their interest rates, they must adhere to the limits set by the State Bank Borrowers repay both the principal and accrued interest, which is calculated based on the total amount owed each month Common types of bank loans include various financial products tailored to different borrowing needs.
● Unsecured loan: a form of bank loan that does not need collateral and is based entirely on the borrower's reputation.
● Mortgage loan: have collateral to get a loan Bank loan interest rates of mortgage loans will be divided into different interest rates depending on the loan purpose.
● Mortgage interest to buy real estate
PROJECT ANALYSIS
The investor funds the project all by his money
Type of Data Data value Properties/ Description
Funded by the investor’s own money.
Is the green cash flow arrows.
1 month with i = 0.004 The first CP always starts at month 4.
Table 4.Summary of the option 1 input data.
Figure 1.The cash flow of scenario 1.
In Scenario 1, the investor fully finances the project, purchasing land, constructing the house, and renting it out for income We analyze the time needed to recover the initial investment, excluding inflation factors, to understand the project's payback period effectively.
Figure 2.The years it takes to meet the break-even point for option 1.
In the initial year, the value n equals 8, representing the duration required to construct the house and wait for tenants to pay their monthly rent Starting from the second year onward, n increases to 12, reflecting the standard one-month rent cycle This transition highlights the typical timeline for property development and rental income collection in real estate investment.
Figure 3 illustrates the money gain calculated using an Excel function The calculation employs the FV function, which requires inputs such as rate, number of periods (n), periodic payment (A), and present value To represent the money gain as a positive value, a minus sign is added to the result of the FV function This method provides an accurate and clear measure of total profit or loss over the investment period.
Scenario 1 demonstrates that the real estate project is highly feasible, as it recovers the initial investment in just 12 years, which is well within the typical 10 to 15-year range for successful real estate investments Generally, a good property project takes around 10 years to recoup investment, with 15 years considered normal and anything beyond 20 years regarded as very slow Therefore, this project's 12-year payback period indicates strong profitability and investment viability.
The investor funds the project all by his money, but the land is renting
Type of Data Data value Properties/ Description
Funded by the investor’s own money or made loan from the bank.
Is the green cash flow arrows.
If the investor rents the land rather than buys it.Only happens in option 2.
1 month with i = 0.004 The first CP always starts at month 4.
Table 5.Summary of the data of option 2.
Figure 4.Cash flow for the second scenario, when the investor rents the land rather than buying it.
Investors opting to build a motel on rented land benefit from lower initial capital requirements, making this approach ideal for those with limited funds or seeking to minimize upfront investment The rental cost is 5 million VND per month, increasing by 10% every three years, while the primary initial expenditure is building the motel at 1 billion VND Since the monthly land rent is significantly lower than potential motel rental income, investors can generate consistent monthly profits, making this an attractive and cost-effective option.
Figure 5.The simplified cash flow for option 2.
The cash flow's profit remains consistent with Scenario 1, allowing us to apply the previous calculation method However, certain differences in this scenario necessitate adjustments to ensure accurate results.
Figure 6.The break-even point of scenario 2 The unit of money is in million VND.
To achieve the break-even point, the total profit must reach or surpass 1.020 billion VND, taking into account the initial house/motel investment of 1 billion VND and land rental costs of 20 million VND from months 1 to 4 Based on the analysis, the investor is projected to recover the entire investment by year 5.
The investor make a loan from the bank, then buying the land and building the house
Type of Data Data value Properties/ Description
Funded by the investor’s own money or made loan from the bank.
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.
1 month with i = 0.004 The first CP always starts at month 4.
Table 6.Summary of the option 3a data.
Figure 7.Cash flow for the 3a scenario, where the investor has installment payment each year.
In this financing option, investors do not use their own funds but instead secure a loan from the bank, which is willing to lend a percentage of the project's value For short-term projects, banks can lend up to 100%, while for long-term projects, the maximum loan coverage is 70%, according to Agribank As a real estate investor, it's crucial to keep the debt amount within 30% of the land's value to protect the initial investment Therefore, the maximum loan amount typically cannot exceed 900 million VND, ensuring the investor maintains a healthy financial position.
The bank will charge an effective annual interest rate of 9%, with payments due at the end of each year To assess the financial implications, we will utilize the future worth method to calculate the accumulated gains This approach resets each year until the debt is fully repaid, providing a clear view of overall interest accrual and repayment progress.
The cash flow analysis for loan repayment is illustrated in Figure 8, with amounts expressed in million VND The table highlights five key columns: year, debt, profit, monthly income, number of monthly income periods, and annual income Monthly income and income periods are based on Scenario 1, accounting for three months dedicated to house construction and an additional month for waiting on tenant payments, with rent collection occurring at the end of the fourth month Annual income is calculated using the formula F = A * (F/A, i, n) or Excel functions like FV(rate, nper, pmt, [pv], [type]), reflecting the total accumulated funds each year, which are subsequently used to pay off the debt, noting that annual savings are lost once the debt is settled.
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 + 1 = ( Debt n- Annual Income n ) × (1+0.09)
Notice that: the ( Debt n- Annual Income n ) × (0.09) is described in the figure 7 as the small red arrows (*).
When the debt falls below zero, it indicates that the investor has successfully paid off the bank loan As shown in the table, by year 6, the debt drops below zero, signifying the completion of the loan repayment Following this milestone, the investor enters the second phase of the project, which involves recovering the invested funds of 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 4 billion in total and he made 0.9 billion loan).
Figure 10 Profit calculation using Excel’s function.
In Year 6, the debt is fully paid, allowing us to take the absolute value of the remaining debt By adding the annual income to this amount, we effectively transform the figure into profit The profit for Year 6 is calculated by combining the absolute debt value with the year's income, providing a clear measure of financial performance.
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 7 & 8:
Profit next year = Profit year 7 = -FV (rate, n, A of that year, pv pvis the profitof last year) = - FV(0.004, 12, 25.41, 378.97) = 709.28
Profit next year = Profit year 8 = -FV (rate, n, A of that year, pv pvis the profitof last year) = - FV(0.004, 12, 25.41, 709.28) = 1,055.81
From year 7, we do not need to consider the annual income of the table.
When the invested amount reaches or exceeds 3.1 billion VND, the investor is projected to break even at year 13, with a total valuation of approximately 3,229.25 billion VND Reaching the break-even point after 13 years is considered a typical timeframe for real estate projects Additionally, the option of paying off the entire loan upfront can significantly impact the project's financial outcomes and overall ROI.
Type of Data Data value Properties/ Description
Funded by the investor’s own money or made loan from the bank.
Is the green cash flow arrows.
Maximum loan from the bank.
Effective interest rate of the loan that the bank charges.
1 month with i = 0.004 The first CP always starts at month 4.
Table 7.Summary of the option 3b data.
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 illustrates the cash flow involved in paying off debt and recovering the initial investment, with values expressed in million VND The table features six key columns: year, debt, profit, monthly income, number of monthly income periods, annual income, and net income Net income is calculated similarly to the method used in Option 1 for determining money gains, providing a comprehensive overview of financial performance over time This data helps assess the effectiveness of debt repayment strategies and the timeline for investment recovery Accurate analysis of these cash flows is essential for making informed financial decisions and optimizing investment returns.
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.
When the money gain using option 1 approach surpasses the debt, the investor will be able to gain profit, which is in year 7.
Figure 15.Profit calculation using Excel’s functions for option 3b.
Hence, the profit in year 7 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 8 profit = -FV(0.004, 12, 25.41, 547.47) = 886.05 Later years are also calculated like year 8, with adjusted A and pv.
Following debt repayment, he needs an additional 3.1 billion VND in investment to reach the break-even point Interestingly, using a single-pay debt approach, the business generates 3,538 million VND in Year 14, allowing it to achieve the break-even point at the same time as with the annual payment method This analysis highlights the effectiveness of different debt repayment strategies in reaching profitability.
The investor do 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 bank, compounded monthly.
The money is stacking from year to year.
1 month with i = 0.004 Compounding period payment period.
Table 8.Summary of the option 4 data.
In this scenario, the investor opts to put their 4 billion VND into a bank account earning compound interest instead of investing in a project This approach allows the investor to compare potential returns from bank savings with those from other investment strategies By analyzing the growth of the invested amount over time, we can determine whether depositing money in the bank yields higher profits than traditional or alternative investments, making it a crucial consideration for maximizing financial gains.
The compounding period will be one month, thus the money he have the next year will be:
Total money year n + 1=Total money year n ×( 1 + 0.004 ) 12 or -FV(i, n, A, pv) with i = 0.004, n = years × 12 months, A = 0, pv = 4000
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:
3.4.1 Do nothing (DN) compared to option 1
Figure 19.Money gain comparison between option 1 and DN option.
Based on the analysis, Option 1, where the investor funds the project entirely with personal capital, underperforms compared to the DN option until year 20 The higher interest rates, driven by economic volatility and increased banking costs, significantly impact the profitability of fully self-funded projects This highlights that in volatile economic conditions, leveraging through DN options may offer better long-term financial advantages.
3.4.2 Do nothing compared to option 2
Figure 20.Money gain comparison between option 2 and DN option.
The DN option outperforms Option 2 until year 28, demonstrating greater long-term viability Although Option 2 reaches the break-even point more quickly and is considered the fastest initial investment, its slower performance after year 28 makes the DN option the more advantageous choice for sustained growth.
3.4.3 Do nothing compared to option 3a
Figure 21.Money gain comparison between option 3a and DN option.
Investors face high-interest rates on loans, making it take approximately 26 years to surpass the DN option Despite this lengthy timeline, the DN option exceeds the other investment options more quickly than Option 2, which reaches the break-even point first This highlights the importance of analyzing both long-term gains and break-even timelines when evaluating investment strategies.
3.4.4 Do nothing compared to option 3b
Figure 22.Money gain comparison between option 3b and DN option.
In option 3b, where the investor repays all the debt upfront, the outcome closely resembles that of option 3a compared to the DN option However, this approach is expected to take longer to outperform the DN option.
CONCLUSION
Real estate projects in practical scenarios are often complex, involving fluctuating interest rates, maintenance costs, late rent payments, and unpredictable tenant occupancy External factors such as pandemics can further impact these investments Despite this complexity, our simplified analysis highlights key insights and critical considerations that are essential for understanding real estate investment dynamics.
Investors can shape their investment plans by evaluating five strategic approaches and selecting the most suitable option For those aiming to recover their investment quickly, options 1 and 2 are ideal choices Conversely, if immediate cash needs are a priority, options 3 and 4 offer practical solutions Interestingly, while option 2 enables reaching the break-even point in the shortest time, option 1 allows investors to surpass the DN option in a shorter period, highlighting the importance of aligning strategy with specific financial goals.
The optimal choice for investors is likely Option 1, where they own both the land and house using their own funds, ensuring greater control and security Alternatively, the DN option may be appealing due to current interest rates being exceptionally high, making traditional financing less advantageous Selecting the right strategy depends on your financial situation and market conditions, but owning property outright remains a strong, secure investment Consider these options carefully to maximize your investment potential amidst fluctuating interest rates and real estate opportunities.