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Entrepreneurship And Its Economic Significance

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Question:

Discuss about the Entrepreneurship and Its Economic Significance.
 
 

Answer:

Introduction:

Strata titled property is actually the best choice following its many distinct pros compared to the freestanding houses (Cassidy & Guilding, 2007). Strata titled property is more of a larger dwelling or complex than just freestanding dwellings. Its major advantages include: (1) Its price with respect to the land costs quite less unlike buying a house, therefore, offering affordability. (2) The strata titled properties have a general upkeep that is considered through its levies. They have a legal entity purposely meant to take care of major repairs within the property (Carrington & Bradshaw, 2009). This is of help to the property owners since the money is paid every quarterly to ensure the property is in good shape (Cassidy & Guilding, 2007). (3) With regards to the fact that this kind of property is cheaper unlike the houses, it attracts most customers raising its demand, which further equates it to a capital growth in the years to come. (4) The strata buildings also create a sense of community and security, reducing cases of burglary and theft. Finally, (5) the bank lending rules favor these kinds of properties, and thus, it is easy to be financed depending on the suburb with 95 percent loan to value ratio.

Additionally, according to the Home Buyers Association (HBA), the strata titles are the kind of property that investors should consider, purchase, keep and preserve, since: first, they can prove as an ultimate sense of ownership. Second, the strata titles are dealing instruments when charging for loans from financial institutions. Lastly, the property can be sold without paying any consent fees to the developer, provided the building is well-maintained.

Moreover, investing in strata titles can yield good returns to the investor (Carrington & Bradshaw, 2009). This can be calculated by measuring the operating return with no reference to financing. After that, the leverage and financing effects are added, and finally, the expected capital gain over the entire life is also added. Its capital gains are just slightly above inflation. In this case, you can start with what is saved for rent, then subtract the operating cost including the lumpy purchases, which results to the normalized operating cash flow. Finally, the percentage of operating return results from dividing the net yearly income by the total cost of property. As rent increases with time, the dollar value of the cash flow also rises. For instance, as financial institutions like banks grow, their stock values also increase and so is their dividend. If there is a stable 5% stock dividend from a bank, this will remain at the 5% price of stock even if the bank, the stock value and the dividend grow. Afterwards, the owner will be in a position to realize a 5% plus the capital gains with time. Since the demand for rental accommodation is not yet reflected in the buying prices, it can actually be a good time to purchase in this area. This is so because the selling price may be higher compared to the rents, and therefore, raising the capital appreciation (Kemeny, 2005).  The operating return may be high or low even at 8% or 2% respectively, but this could be simply because the areas with higher increases in the prices of the house may result to lower returns, and the other way round.

On the other hand, leverage will amplify the returns of the property. Of course, the use of either cash or mortgage to pay for the assets has no effect (Rosenberg & Rusert, 2014). However, with the basic understanding of leverage and the calculated operating return in mind, if the percentage debt is higher than the percentage operating return, then the net operating return becomes negative for the part of the debt. You should be comfortable with the calculated average return which may at times discourage most investors. For instance, with the calculated operating return of 5%, the mortgage rate of 7% and 75% finance for the purchase will have a 0.5% loss each year. That is, (25% * 5%) + (75% * neg2%) = 0.5% loss, which may only be recovered from the final capital gains (Rosenberg & Rusert, 2014). All the attention is particularly on the capital gains even though most times the operating returns show most benefits.

By illustration, it is precisely evident that strata titles are products that have had a tremendous increase in demand, as well as, the transaction volumes (Fisher & McPhail, 2014). For instance, in this case, it is clearly shown that between 2013 and 2015, there was this increase transaction volumes starting from $80,000,000 to $120,000,000. This growing trend is enough to make the business owners to pursue the objective of purchasing a strata property. Their low interest rates and high leverages automatically make this investment attractive. Therefore, it is an investment that can yield spectacular results. 

 

Of course, this cannot be an opportunity to lose. I possess good negotiation skills that will definitely make Peter go for the purchase. These skills include but not limited to being sunk-cost conscious, prudent, overconfident, ignorant to the problem, strong in confirming evidence, among many others. The fact that Peter had given in to purchasing the property is enough to make him not change his mind simply because of the cost which he finally realizes is much more than what he had expected to use. He has to stick to his decision which he may have probably invested so much in, that he cannot afford to abandon or opt for something different. Besides, just like many managers resist reflection before action, I would also do the same. Reflection on the problem is just a waste of time as it requires too much work to be done. Therefore, looking at the issues at hand may make Peter lose a good opportunity. He should just focus and be booted to take his journey.

With these kinds of negotiation skills, I would practically ensure the sale proceeds by considering several options. First, review of the contract of sale can automatically make the buyer go ahead with the initial decision of purchasing the building. The contract could include: (1) a zoning certificate from the local council; (2) documents that show other registered interests over the strata titles; and (3) the title to the property according to the Land Title Office. Asking to see the contract of sale just for once can be something good and the promising facts in them can prove acceptable and convincing to the buyer to purchase the building. 

Second, the issue of cost which is a worry to Peter should not be anything to make him withdraw from his previous decision. The accountant talks of only $325,000 which is quite a smaller amount than what he had expected he would be able to use. However, his anticipated amount is not different by far from what the accountant releases. They only have a difference of $50,000 which Peter can borrow from any financial institution since it is not too much and cannot have an absurd interest payment. Besides, the returns of investing in this kind of property are huge, as the volumes are likely to grow each year depending with demand (Nederveen Pieterse & Dasgupta, 2009). Being that there is a high demand of rental accommodation in this area of Jonesville at this particular time because of the increasing population and being a new area with a new shopping center, then it can automatically result to big volumes. As a corollary, the returns can help in repaying the liabilities as fast as possible, even within a month or two, after which life continues as usual.

Aside from that, the price range is definitely something not to worry about. Peter can consider paying for the property in two installments and start earning immediately from the units. After all what is left after he gets the whole amount from his accountant is quite small compared to what he can afford to pay. The other amount can be paid on the settlement period, which is usually after a month or after six weeks. However, if the buyer does not have this whole amount at this time, then the lender can do this on his behalf. This is the period when he can also get another chance to ensure the property is in the same state as it was initially when he agreed to purchase it, and the agreed inclusions are also there (Brunet, 2014). If this is not the case, then the buyer is allowed to withdraw from the contract and even ask for the refund.

The amount spent on buying the strata home unit should not be anything regrettable (Bhargava, 2008). After the purchase, the buyer can also start looking for insurance since he becomes the owner of the property after the exchange of the contract. In this case, the buyer and the conveyancer will have to sit and arrange a Certificate of Currency from the insurer of the Body Corporates (Bhargava, 2008). Once the property is adequately insured then there will be no chance of loss or fear of loss.

 

References

Bhargava, S. (2008). Entrepreneurial Management. Los Angeles: Sage Publications Pvt. Ltd.

Brunet, R. (2014). HOME Sweet HOME. Western Hotelier, 38(2), 20-26.

Carrington, P. T., & Bradshaw, M. V. (2009). Entrepreneurship and Its Economic Significance, Behavior and Effects. New York: Nova Science Publishers, Inc.

Cassidy, K., & Guilding, C. (2007). Tourist accommodation price setting in Australian strata titled properties. International Journal Of Hospitality Management, 26(2), 277-292.

Fisher, R., & McPhail, R. (2014). Residents' Experiences in Condominiums: A Case Study of Australian Apartment Living. Housing Studies, 29(6), 781-799.

Kemeny, J. (2005). “The Really Big Trade?Off” between Home Ownership and Welfare: Castles' Evaluation of the 1980 Thesis, and a Reformulation 25 Years on. Housing, Theory & Society, 22(2), 59-75.

Nederveen Pieterse, J., & Dasgupta, S. (2009). Politics of Globalization. Los Angeles: Sage Publications Pvt. Ltd.

Rosenberg, J., & Rusert, B. (2014). Framing Finance. Radical History Review, (118), 64-91.

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