Question

Encik Tee sets up a homestay on the lot of land purchased at RM320, 000. The overall cost of setting up this homestay is
RM750, 000.

1.What type of investment was made by Encik Tee?
2. State the potential risks, return and liquidity of the investment made by Encik Tee.
3.Was the investment made by Encik Tee a wise move? Justify the answer.

Answer 1

1.What type of investment was made by Encik Tee? : The Investment made by Encik Tee is simply the Real State Investment.

2. State the potential risks, return and liquidity of the investment made by Encik Tee.:  Potential Risk is Risk of getting business, Market fall down of the property, Statutory approval if the building is residential complex for starting as Commercial operations.

Return: Return will be very minimal in starting era as it is difficult for company to reachthe breakeven. Secondly as per market startegy some mishappening like criminal / civil offence took place, this may lead to closure of property.

Liquidity: Liquidity is readily on an avergae even if they got the purchaser, the bank loan , registration all will stretch the liquidty period to approx more than months to 6 months. And Seller will also not fetch the amount he desire.

3.Was the investment made by Encik Tee a wise move? Justify the answer.: Currently investment made by the Enick is wise move, because real estate renting business is booming now a days due to increase in gloablisation and provatisiation and increase in tourism. Investment made in the sector is wise, but it is not advisable to put all eggs in single box, it means he has put all money in Purcahsing the business, and later working capital source is unknown.

Here he can have Loan for purchase of property and funds to be utilsied for Working capital ( Running business) becasue putting funds for purchasing the property and later on mortagge the proeprty and taking working capital loan , Finance cost will be higher in that option as compared to in purchase of property on loansec ondly on purvasing property on loan, Valuation and other services are also offerred by the Banks, FI like.. Registration of property, Usage, Valuation , Insurance and as they analyse the proerty as business prospects as well as return of principle and interest. Secondly if Bnak willl nod the project by checking his business prospects, Enick will be more confident over his business prospects.

Otherwise, Move is correct but Enrick did not utilise the funds in proper manner.