INVESTMENT OF RENTAL HOUSING IN LONG BIEN DISTRICT – HANOI Preamble Currently the population of Hanoi was still growing very fast and the largely immigrant workers in Hanoi are from neighboring provinces to live and work Currently, Long Bien District in Hanoi has many projects which were put into operation and the problem is always painful and peak housing situation for the workers who work here Housing prices in Hanoi today is too high compared to the income level of the people, especially the workers and employees, so rental housing is the solution that is almost done when they move to Hanoi to work and live In the eyes of investors, rental housing market can be profitable investment, high profit, high investment costs and less risk I Project Description Project overview Currently, investor has 01 residential plot which was inherited Large piece of land is 300m2 in size 15x20 with the square land Plot of land is with the 02 surfaces, 01 line in the wide area is 4.5 m2, and the other is 2.5 m2, cars can take place in front of the house The plot has prime locations, in crowded residential neighborhoods, very near clinics; schools There are 02 options: a One is: Sell the land for 40 million VND / 01m2, earn 12 billion VND Deposit that amount into the bank and get interest rate at 9% per 01 year b Secondly, invest in building mini apartments for rent After 10 years, the investor can sell the property for 50 million VND per 01 m2 or continue trading more Investment rental property project is a 10-storey mini apartment, located in the area of 300m2 The building includes 01 parking basement, 01 floor reserved for sale or rental kiosk investment business categories serving life for families living in the house and 09 floors are for rent Lot location situated in Long Page of 18 Bien ward, Hanoi, near Vinh Tuy Bridge, Sai Dong Industrial Park, just 7.5 km from Hoan Kiem Lake The land is not in the plans, which have been granted permission to use land permanently, which enables high-rise building Photos (Refer Appendix 1,2) Currently in Long Bien district there are about 60 companies operating plants in Sai Dong Industrial Zone A, B, Long Bien Industrial Park, Dai Tu There are also companies like 10 Garment Company, Duc Giang Garment company the number of workers and staff members currently work falls between 20,000 people Detailed description of the project to build mini apartment for rent a House design  The house was designed 10 floors with 01 basement floors In which: The apartment is with 02 lifts and 01 staircase The total area of the stair and hall on each floor is 60m2 including 20m2 for stairs, 8m2 for elevator and 32m2 for lobby  The basement is used for parking  First floor: - 02 small rooms, each measuring 15m2 closed for security guards and house management service - 01 room measuring 50m2 for catering services and health fitness - 01 mini supermarket large 70m2 - 01 rooms with 80m2 area for café, breakfast, lunch business  From the second floor to the seventh floor, there are 12 rooms in each with the area at 20m2  From the eighth floor to the tenth floor, there are rooms in each with the area at 40m2 b The business services  Apartment for rent with 02 kinds: 20m2 and 40 m2 Page of 18  Minimart has consumer goods such as fresh fruits and vegetables, confectionery, beverages, tobacco, food, milk for children, the families of consumer goods  Café, fast food service  Gym, fitness service II Financial ratios calculation The cost of the project (Unit: thousand VND) a Cost of construction: Apartment with 10 floors and 01 basement The area is 3,300 m2 (Unit: thousand VND) No Cost Unit Quantity 100 3300 4500 3300 Design Construct Total Amount 330,000 13,200,000 13,530,000 b The cost for the basement (Unit: thousand VND): No Cost Unit Quantity Fire Equipment 200 10 Electric light 40 10 Total c The cost for first floor (Unit: thousand VND) No Cost Unit Minimart Supermarket shelves Stalls and equipment Air conditioner Fan Electric light Fire equipment Exercise Room Treadmill for fitness Exercise Tools Air conditioner 10 Electric light 11 Fan 12 Fire equipment Food store Page of 18 Quantity 800 5,000 6,000 500 100 300 2 5,000 4,000 6,000 100 500 300 Amount 2,000 400 2,400 Amount 29,500 4,800 10,000 12,000 1,000 500 1,200 45,700 15,000 16,000 12,000 500 1,000 1,200 54,800 13 14 15 16 17 18 19 20 21 22 23 Plastic tables and chairs for dining Cooker Pots, dishes Electric light system Air conditioner Fan Fire equipment Staff room Small fan The heater Electric light Sanitary equipment Total 500 5,000 50 100 6,000 500 300 10 500 60 2 200 1,750 100 1,000 2 2 5,000 10,000 25,000 600 12,000 1,000 1,200 6,100 400 3,500 200 2,000 136,100 d The cost for the 2nd floor to the 7th floor (Unit: thousand VND): No Cost Unit price Quantity 1,750 72 1,000 72 60 72 60 12 60 300 The heater Sanitary equipment Electric light in the house Corridor’s electric lamps Stair’s electric light Fire Equipment Total e The cost for the 8th floor to 10th floor (Unit: thousand VND) No Cost The heater Sanitary equipment Electric light in the Unit price 2,250 1,000 Quantity 60 house Corridor’s electric lamps 60 Stair’s electric light 60 Fire Equipment 300 Total f Depreciation expenses of fixed assets, interest expenses Amount 126,000 72,000 4,320 720 360 1,500 204,900 18 18 Amount 40,500 18,000 36 2,160 18 1,080 360 1,500 63,600 From the above data, assuming construction costs amortized in 10 years, equipment and tools has 05 year amortization After 05 years, the equipment Page of 18 will be replaced entirely, we have a summary of initial investment costs as follows (Unit: thousand VND): No Cost Amount Cost of construction The investment cost of Time 01 Total 13,530,000 02 144,000 02 02 4,800 272,000 409,800 13,530,000 equipment, fixed assets and small tools The cost for basement The cost for first floor The cost for 2nd floor to 7th 72,000 2,400 136,100 floor The cost for 8th floor to 10th 204,900 127,200 floor 63,600 Total 14,488,000 In particular, the construction costs will be depreciated over 10 years Equipments are depreciated over 05 years After 05 years, new equipment will be completely replaced We have the following table of depreciation (Unit: thousand VND): Year Cost of construction The cost of equipment, Total depreciation tools and devices 1,353,000 95,800 1,448,800 1,353,000 95,800 1,448,800 1,353,000 95,800 1,448,800 1,353,000 95,800 1,448,800 1,353,000 95,800 1,448,800 1,353,000 95,800 1,448,800 1,353,000 95,800 1,448,800 1,353,000 95,800 1,448,800 1,353,000 95,800 1,448,800 10 1,353,000 95,800 1,448,800 Capital is raised from 02 sources: Equity and loans from banks In which: Page of 18  Equity: 8,000 were raised from shareholders Capital came from 04 members, in which each person is with 2,000  Loans from banks: 7,000 Assumptions: Interest rate bank loans for home building and repair are now 12% / 01 years The plan is for the 05 years, the interest rate is fixed for 05 years Each year, the bank interest is 2,543,375.38 (211,947.95 / 01 months) Borrowing costs by year table Year Interest (thousand VND) 2,543,375 2,543,375 2,543,375 2,543,375 2,543,375 Revenue calculation - business operations cost (Unit: thousand VND) a Sales - cost of rental operations Assumptions:  After researching the current market, we decide the price for renting 01 room area 20m2 at mini apartment in Long Bien ward is 2,500 per month and 5,000 for the apartment with area 40m2 Total rental revenue is 270,000 per month  Assuming fixed equipment investment will be amortized in 05 years These small devices such as light bulbs, household sanitary housing repair and replace itself when damaged Therefore, all 01 year depreciation of equipment from 2nd floor to 10th floor is: 53,700 / 01 years  Costs of electricity and water will be paid by households therefore it is not included in this revenue - expenses table  We have monthly revenue from rental operations as follows: No Category Month Rent 2nd floor - 7th floor Page of 18 Unit price Amount 12 180,000 2,160,000 Rent the 8th floor floor 10 Cost of goods sold Cost of sales Difference 12 90,000 1,080,000 12 12 0 0 3,240,000 b Revenue from supermarket operations Assumptions:  The revenue each day of the supermarkets is 10,000 so the revenue in 01 month is 300,000  Supermarket spends 150,000 on purchasing goods in 01 month  Employees payment: 06 people (including 02 cashiers, 03 salesman and 01 security): 30,000  General expenses include: Electricity, water: 5,000 We have the sales table as follows: No Category Month Revenue Amount Revenue 12 300,000 3,600,000 Cost of goods sold 12 150,000 2,100,000 Cost of sales 12 35,000 420,000 Difference (1-2-3) 1,380,000 c The resulting table service business fitness training Assumptions:  Exercise Room attracted regular 100 customers per month Each person plays 400/01 month Revenue is 40,000/01 month  Electricity and water expense: 3,000/01month  Salary for 02 employees: 10,000/month No Category Monthly Revenue Quantity 100 Unit price 400 Amount 40,000 0 Cost of goods sold Cost of sales 13,000 Page of 18 480,000 Total revenue per year 81,000 Total cost per year 324,000 Difference (= 4-5) d Restaurant operation revenue - cost table Assumptions:  The restaurant serves 100 times of customer for sessions: morning, afternoon, evening Each customer pays 0.3 for a meal The revenue in month is 90,000 equivalents to 1,080,000 per year  The restaurant spends 30,000 on purchasing goods equivalent to 360,000 per year  Salary for 04 employees including 02 cooks and 02 serving staff is 20,000 per month equivalent to 240,000 per year  Utility expense is 3,000 per month equivalent to 36,000 per year No Category Revenue Cost of goods sold Cost of sales Difference (= 1-2-3) Month 12 12 12 Unit price 90,000 30,000 23,000 Amount 1,080,000 360,000 276,000 444,000 e Management expense Assumptions:  Salary for staff including 02 duty staff, 02 basement car look, 02 serving staff: 24,000 per month  Subsistence expenses for electricity services, water, sanitation, cable No 12- Category Salary expense Sub-activities Month 12 12 Page of 18 Unit price 24,000 5,000 Amount 288,000 60,000 3- Total expenditure management 348,000 f From the above data, we have a summary of revenue - operating costs in the first 05 years as follows (Unit: thousand VND) No Category Revenue Revenues from rental operations Revenue from supermarket operation Revenue from gym operation Revenue from restaurant operation The yearly cost Depreciation cost Interest expense on borrowing Expenses Cost of goods sold Cost of sales Management cost Difference revenue - costs Amount 8,400,000 3,240,000 3,600,000 480,000 1,080,000 7,004,175 1,448,800 2,543,375 2,160,000 852,000 348,000 1,047,825 In the next 05 years of the project, borrowing costs will be paid off, there are only operating costs and depreciation costs No III Category Revenue Expense Difference revenue - costs Amount 8,400,000 4,808,800 3,591,200 Financial indicators calculation (Unit: thousand VND) Report on operations management in the first year: No CATEGORY Note Sales of goods and services Deductible items Net revenue from sales and services (03 = 01-02) Cost of goods sold Page of 18 First year 8,400,0 00 8,400,0 00 2,160,0 Gross profit from sales of goods and services (5 = 3-4) Financial income Financial expenses - Of which: Interest expense Cost of sales 10 Administration Costs 11 Depreciation of fixed assets 12 Net profit from operations {12 = + (6-7) - (9 + 10) -11} 13 Other income 14 Other expenses 15 Profit (15 = 13-14) 16 Profit before tax (16 = 12 + 15) 17 Current income tax expense 18 Deferred income tax expense 19 Profit after income tax (19 = 16-17 - 18) 20 Profit divided by shareholders 21 22 00 6,240,0 00 2,543,3 75 2,543,3 75 852,0 00 348,0 00 1,448,8 00 1,047,8 25 - Retained earnings reinvested Profits additional net working capital Page 10 of 18 1,047,8 25 261,9 56 30% 40% 30% 785,8 69 235,7 61 314,3 48 235,7 61 Ten years business result management report Assumptions:  Interest rate unchanged at 12% in 05 years  Profit divided by shareholders is 30%, retained earnings reinvested in the next year is put into operation in long term savings with interest rate of 7% / year, this section will not be included the production in activities of the next year 30% remaining will be added to the net working capital No CATEGORY Sales of goods and services Deductible items Note Year 8,400,0 00 - Year 8,400,0 00 - Year 8,400,0 00 Year 8,400,0 00 - - Year 8,400,0 00 - Year 8,400,0 00 - Year 8,400,0 00 - Year 8,400,0 00 - Year 8,400,0 00 - Year 10 8,400, 000 - Revenue from sales of goods and services (03 = 01-02) 8,400,0 00 8,400,0 00 8,400,0 00 8,400,0 00 8,400,0 00 8,400,0 00 8,400,0 00 8,400,0 00 8,400,0 00 8,400, 000 Cost of goods sold 2,160,0 00 2,160,0 01 2,160,0 02 2,160,0 03 2,160,0 04 2,160,0 05 2,160,0 06 2,160,0 07 2,160,0 08 2,160, 009 6,240,00 6,239,99 6,239,99 6,239,99 6,239,99 6,239,99 6,239,99 6,239,99 6,239,99 6,239,99 Gross profit from sales of goods and services (5 = 3-4) Financial income Financial expenses 2,543,3 75 2,543,3 75 2,543,3 75 2,543,3 75 Page 11 of 18 2,543,3 75 - - - - - - - - - - - Of which: Interest expense 2,543,3 75 2,543,3 75 2,543,3 75 2,543,3 75 2,543,3 75 - - - - - Cost of sales 852,0 00 852,0 00 852,0 00 852,0 00 852,0 00 852,0 00 852,0 00 852,0 00 852,0 00 852, 000 10 Administration Costs 348,0 00 348,0 00 348,0 00 348,0 00 348,0 00 348,0 00 348,0 00 348,0 00 348,0 00 348, 000 11 Depreciation of fixed assets Net profit from operations {12 = + (6-7) - (9 + 10) -11} 1,448,8 00 1,448,8 00 1,448,8 00 1,448,8 00 1,448,8 00 1,448,8 00 1,448,8 00 1,448,8 00 1,448,8 00 1,448, 800 1,047,8 25 1,047,8 24 1,047,8 23 1,047,8 22 1,047,8 21 3,591,1 95 3,591,1 95 3,591,1 95 3,591,1 95 3,591, 195 12 13 14 15 16 17 18 19 Other income - - - - - - - - - - Other expenses - - - - - - - - - - Profit (15 = 13-14) - - - - - - - - - - Profit before tax (16 = 12 + 15) Current income tax expense Deferred income tax expense Profit after income tax (19 = 16-17 - 18) VI.30 VI.30 1,047,82 1,047,82 1,047,82 1,047,82 1,047,82 3,591,19 3,591,19 3,591,19 3,591,19 3,591,19 261,95 261,95 261,95 261,95 261,95 897,79 897,79 897,79 897,79 897,7 99 785,86 785,86 785,86 785,86 Page 12 of 18 785,86 2,693,39 2,693,39 2,693,39 2,693,39 2,693,39 20 21 22 Profit divided by shareholders Retained earnings reinvested Profits additional net working capital 30% 235,761 235,761 235,761 235,761 235,761 808,019 808,019 808,019 808,019 808,019 40% 314,3 48 314,3 48 314,3 48 314,3 48 314,3 48 1,077,3 59 1,077,3 58 1,077,3 58 1,077,3 58 1,077, 358 30% 235,7 61 235,7 61 235,7 61 235,7 61 235,7 61 808,0 19 808,0 19 808,0 19 808,0 19 808, 019 Spreadsheet savings rate investments and retained earnings Year 10 Beginning 314,348 650,699 1,010,596 1,395,685 2,570,741 3,828,052 5,173,374 6,612,869 8,153,128 Interest 7% 7% 7% 7% 7% 7% 7% 7% 7% 7% Page 13 of 18 Ending 336,352 696,248 1,081,337 1,493,383 2,750,693 4,096,015 5,535,510 7,075,769 8,723,847 The project cash flow With the current corporate income tax is 25% We have in the first 05 years OCF = 785,869 + 1,448,800*25% = 1,148,069 In the next 05 years OCF = 2,693,369 + 1,448,800*25% = 3,055,596 At the end of the 10th year, the entire house sold for 50,000 / 01m2 grossed 15,000,000 At the same time maturing passbook savings of principal and interest received shall be: 8,723,847 Year Operating cash flow Cash flow from Year Year Year Year Year Year Year Year Year Year Year 10 1,148,069 1,148,069 1,148,069 1,148,069 1,148,069 3,055,596 3,055,596 3,055,596 3,055,596 3,055,596 investing activities -14,009,000 0 0 -479,000 0 0 23,244,847 Total cash flow The financial indicators decision: a NPV = 3,207,153.71 >0 b IRR = 15%> 12% c ROE:  In the first 05 years ROE = 785,869/ 7,009,000 = 11.21%  In the next 05 years ROE = 2,693,396/ 7,009,000 = 38.43% d ROE:  In the first 05 years ROE = 785,869/7,009,000 = 5.61%  In the next 05 years ROE = 2,693,396/ 7,009,000 = 19.22% IV Project Evaluation (Unit: thousand VND) Page 14 of 18 1,148,069 1,148,069 1,148,069 1,148,069 669,069 3,055,596 3,055,596 3,055,596 3,055,596 26,300,443 Based on the results, we see NPV > and IRR > 12 % This shows that the project is feasible and we can invest in ROE shows profit increased 11 % and 38.43 % after paying off the bank loan interest This is a high profit margin indicates that 01 out of the capital, will be collected in the first 05 years at 0.11 and 0.3843 for the next 05 years On the other hand, compared with the sale of the property at the present time and take the profit savings banks have: Interest = 12,000,000 * (1 +12 %) 10 = 23,605,816 The project brought the ending profit at about: 26,779,443 have a difference of 2,694,627 The value of assets sold after 10 years is 15,000,000 In fact, with the current rate of development of Hanoi, the value of the house after 10 years is much higher, so the difference will be even greater The advantage of the investor is not investing money to buy the land by inheritance, less than the original cost After 10 years, instead of selling the house, investors can still continue trading The business now investors are not subject to interest received ROE is 38.43 % In 20 years, assuming the investor can keep the house to live in and not sell it, then save the original interest received is: 31,951,509 NPV = 1,227,860.35 and IRR = 13 % The plan is still workable Plan above does not mention to the profits that the shareholders are divided yearly (30 %) If the money is not divided but retained for reinvestment of savings, after 10 years, the principal and interest savings will be 14,129,260, profit will increase by 5,405,413 compared with 30% profit sharing plans that are mentioned in the article That is in addition to the profits of this project, the shareholders will have a total of 5,405,413 if the money is divided to provide savings Page 15 of 18 References Slide lecture by Dr Nguyen Van Dinh Policy Analysis and Investment Securities - Dr Bui Kim Yen - HCMC University of Economics Website: www.tailieu.vn; www.giaiphapexcel.com; www.saga.vn Page 16 of 18 Appendix 01: Photograph of Lot Investment Page 17 of 18 Appendix 02: Location on the map and the distance to Hoan Kiem Lake Page 18 of 18 ... the construction costs will be depreciated over 10 years Equipments are depreciated over 05 years After 05 years, new equipment will be completely replaced We have the following table of depreciation... with the current rate of development of Hanoi, the value of the house after 10 years is much higher, so the difference will be even greater The advantage of the investor is not investing money to... operation Revenue from restaurant operation The yearly cost Depreciation cost Interest expense on borrowing Expenses Cost of goods sold Cost of sales Management cost Difference revenue - costs