Investing Profiles of the Investors
John DeRight is the retired elder cousin. All of his wealth is invested in securities. His primary investment is in a startup company, which bought his startup company. He currently has $ 6 million in stocks and the main source of income aredividends, which he receives over his stock investment.
If at this point John does not diversifies and places all of his investments in one basket, it can prove to be risky for him especially in the share market. He is now ready to take out $ 3 million out of his securities to invest in real estate and diversify his portfolio. He wants to balance the risk in his portfolio by investing in the real estate market. His investor profile can be stated as a profile of a low risk investor as he wants periodic income payments or steady income stream. He would then be able to utilize it for his daily expenses.
Judy DeRight is a much younger investor as compared to John. She owns and operates her own company and she is the President of her company as well. The company is performing well and generating an income of $ 800,000 before taxes and $ 500,000 after taxes. She has been able to accumulate funds equal to $ 3.5 million and now she is planning to diversify her portfolio by investing in the real estate.
She can be stated to be average to high-risk taker and belongs to the high-income bracket. She does not need immediate cash flows from her investments. Her risk profile is of the high risk and high return investor and she wants to get high potential gains in later years through appreciation. She is currently looking for real estate properties, which would offer her tax shelter capabilities due to her current high ordinary income other the other sources.
Risks in the Four Properties
There are a number of risks from investment in each of the four subject properties. These are briefly listed below:
- Risk of increase in taxes
- Risk of timing due to construction of some of the properties
- Risk of declining cap rates
- Risk of default on debt
- Risk of lower tax benefits
- Risk of lower MOC
- Tax effect on ATIRR
- Standard deviation of cash flows
Recommended Properties for DeRight Cousins
The recommendations for John and Judy have been made based on the financial returns of both the properties, the investment returns, the property appreciation, occupancy of the properties, tax benefits and their relative risk profiles for investment. Based on all of these factors, Angus would recommend to both the investors about who they should form a contract with for investing in one of the real estate properties.
For John, the safest investment among all the four investment properties can be the Alison Green property, which is a existing 100-unit garden apartment in Montgomery County. The currency occupancy of this property is high at 97% and therefore, it could be said to be the safest investment for John……………………
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