Comprehensive Case Study: 25-Year-Old Female with New Rash (Class 6512) | iHuman Case Analysis Week #4

I HUMAN CASE STUDY WEEK

Comprehensive Case Study: 25-Year-Old Female with New Rash (Class 6512) | i Human Case Analysis Week #4

I HUMAN CASE WEEK #4 18 MONTHS PATIENT REASON FOR ENCOUNTER: COUGH CASE STUDY 2024 VERSION (WALDEN UNIVERSITY (CLASS 6541)

Retirement Income: The Case of Direct Investment in Short-Term Rental Property Compared to a Dividend\r\n\r\nStock\r\n\r\nFor the most optimal reading experience we recommend using our website.\r\nA free-to-view version of this content is available by clicking on this link, which\r\nincludes an easy-to-navigate-and-search-entry, and may also include videos,\r\nembedded datasets, downloadable datasets, interactive questions, audio\r\ncontent, and downloadable tables and resources.\r\n\r\nAuthor: Chia-Li Chien, Stefan W. Cosentino, Hossein Salehi\r\n\r\nPub. Date: 2022\r\nProduct: Sage Business Cases\r\nDOI: https://doi.org/10.4135/9781529794274\r\nKeywords: dividends, property, direct investment, investment, income, retirement, cash flow, net present\r\nvalue, internal rate of return, second homes\r\nDisciplines: Business & Management, Finance, Capital Budgeting, Financial Investment/Analysis, Small\r\nBusiness Finance\r\nAccess Date: May 4, 2024\r\nPublishing Company: SAGE Publications: SAGE Business Cases Originals\r\nCity: London\r\nOnline ISBN: 9781529794274\r\n\r\n© 2022 SAGE Publications: SAGE Business Cases Originals All Rights Reserved.\r\n\r\nSage\r\n\r\n\r\nSage Business Cases\r\n\r\nPage 2 of 19 Retirement Income: The Case of Direct Investment in Short-Term Rental\r\nProperty Compared to a Dividend Stock\r\n\r\nThis case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom dis-\r\ncussion or self-study, and is not meant to illustrate either effective or ineffective management styles.\r\n\r\nNothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educa-\r\ntional, or personal use only within your university, and cannot be forwarded outside the university or\r\n\r\nused for other commercial purposes.\r\n\r\nThe case studies on Sage Business Cases are designed and optimized for online learning. Please re-\r\nfer to the online version of this case to fully experience any video, data embeds, spreadsheets, slides,\r\n\r\nor other resources that may be included.\r\nThis content may only be distributed for use within Seneca College.\r\n2024 Sage Publications, Inc. All Rights Reserved\r\n\r\nAbstract\r\n\r\nThe rise of Airbnb and similar online platforms is prompting many retirees to consider short-term rental\r\nproperty as an alternative retirement investment. Therefore, the ability to analyze short-term rental\r\n\r\nproperty investment is important for financial planners who are helping retirees make informed deci-\r\nsions to potentially meet their retirement goals. This case study illustrates how to use the capital ex-\r\npenditure (CAPEX) evaluation process and its analysis to determine if short-term rental property in-\r\nvestment is a viable alternative retirement income compared to a dividend stock performance.\r\n\r\nCase\r\n\r\nLearning Outcomes\r\n\r\nBy the end of the case study, students should be able to:\r\n• conduct a net present value (NPV) analysis of a capital investment;\r\n• develop assumptions based on an analysis of a capital investment in a rental property;\r\n• comprehend the steps to analyze a capital investment;\r\nSage\r\n\r\n\r\nSage Business Cases\r\n\r\nPage 3 of 19 Retirement Income: The Case of Direct Investment in Short-Term Rental\r\nProperty Compared to a Dividend Stock\r\n\r\n• conduct a cash flow analysis;\r\n• evaluate opportunities to generate retirement income and identify options;\r\n• develop recommendations to meet a client’s retirement income goals.\r\nThe facts presented in this case are real, but the names are changed to protect the clients’ confidentiality.\r\n\r\nIntroduction\r\n\r\nOwning a home has long been an American dream. The U.S. homeownership rate in early 2021 was 65.6%\r\n(U.S. Department of Commerce, 2021).\r\n\r\nData 1. U.S. Home Ownership Rate\r\n\r\nClick here to view the online version of the case for an optimal experience of interactive data embeds.\r\n\r\nOf the total housing units in 2018, the National Association of Home Builders suggests that 5.5% of the homes\r\n\r\nwere second homes (Zhao, 2020). In a February 2020 survey for the NAHB/Wells Fargo Housing Market In-\r\ndex (HMI), 15% of buyers of single family home purchases were second homes either for leisure or as an\r\n\r\ninvestment (Emrath, 2021). Redfin reported that buyers of second homes pursuing a mortgage rate lock has\r\nincreased 100% year over year (Katz, 2019). According to a 2021 U.S. Department of Commerce report on\r\nhousing, owner-occupied housing units made up 58.3% of total housing units, while renter-occupied units\r\n\r\nmade up 30.6% of the inventory in the first quarter of 2021. The top three states with most second homes in-\r\nclude Florida, New York, and California (Zhao, 2020), which are also among the top five destination states for\r\n\r\nAmerican travelers (Chelangat, 2018). These states have also seen housing prices increase over 6% in the\r\nlast year (barchart.com, 2021). According to the National Association of Realtors in its 2020 survey of second\r\nhome buyers, 49% of the second home purchases were paid for in cash only.\r\n\r\nThe proliferation of platforms such as Airbnb and VRBO (Vacation Rentals By Owner), and the popularity of\r\nhome rentals as alternate accommodations to a hotel, may be contributing to the growth of second home\r\npurchases for use as home rentals. Airbnb’s largest market is the United States. Airbnb constitutes 19% of\r\nSage\r\n\r\n\r\nSage Business Cases\r\n\r\nPage 4 of 19 Retirement Income: The Case of Direct Investment in Short-Term Rental\r\nProperty Compared to a Dividend Stock\r\n\r\ntotal U.S. accommodations demand (Ipropertymanagement.com, 2021). Also reported is that revenue growth\r\nfor whole unit rentals has increased an average of 76% each year (eMarketer, 2018) in most Airbnb markets\r\nsuggesting a growth in more second homes being listed for rental. A 2018 eMarketer report stated that 33.9\r\nmillion adults used Airbnb in the United States in 2017, and projected that the number will have grown to 45.6\r\nmillion by 2022 (eMarketer, 2018).\r\n\r\nData 2. Airbnb Annual Revenues\r\n\r\nClick here to view the online version of the case for an optimal experience of interactive data embeds.\r\n\r\nIn major cities, Airbnb rentals are cheaper than hotels, but this does not hold true across the country. In 2015,\r\nthe average daily rate (ADR) of an Airbnb rental in New York City was 40% cheaper than the ADR of hotels\r\nin 2015, and in Los Angeles it was 5.7% cheaper (CBRE Group, 2016). However, the average hotel ADR in\r\nthe United States was 25% cheaper than the average Airbnb ADR in that same year (CBRE Group, 2016).\r\nNevertheless, traveling consumers continue to prefer short-term rentals, thereby increasing opportunities for\r\n\r\ninvestors to generate revenue from short-term rentals. What follows is a study of one such couple, consider-\r\ning an investment in a short-term rental property.\r\n\r\nThe Rental Opportunity and Current Portfolio\r\n\r\nMatt and Rosie are an affluent retired couple who missed two opportunities to invest in a second home as an\r\ninvestment and rental property. The first missed opportunity was a beach condo in Fiji that cost USD 10,000 in\r\n1990. Today the condo is worth USD 2 million. The second missed opportunity was a beach condo in Mexico\r\nthat cost USD 50,000 in 2000. Today the condo is worth USD 1 million.\r\nMatt and Rosie believe the Airbnb trend will continue as long as travel rebounds from the recent COVID-19\r\n\r\npandemic. Matt found a newly renovated condo complex in Hawaii, built in 1990, with the prices ranging be-\r\ntween USD 500,000 and USD 700,000, depending on the square footage. The maintenance cost is USD 500\r\n\r\nto USD 700 per month. Matt believes a second home will appreciate in value and that the short-term rental\r\nSage\r\n\r\n\r\nSage Business Cases\r\n\r\nPage 5 of 19 Retirement Income: The Case of Direct Investment in Short-Term Rental\r\nProperty Compared to a Dividend Stock\r\n\r\nincome will supplement their retirement income.\r\nMatt has held 3,604 shares of PepsiCo Inc (NASDAQ: PEP) in his investment portfolio since 2000. The cost\r\nbasis for PEP is USD 41.47 per share. PEP is 26% of Matt’s investment portfolio. Matt would prefer not to\r\ntake out any loans to invest in the condo in Hawaii. Rosie recently inherited USD 300,000, and Matt would\r\nlike to use the inheritance and the sale of PEP shares to finance the purchase. Matt estimates that the net\r\ncash flow from this short-term rental will be USD 500 per month.\r\nMatt and Rosie’s portfolio comprises 26% of PEP, 18% in cash (includes the inherent cash), and 56% in other\r\nstocks. Based on their recent risk tolerance answers, the recommended allocation is a balanced portfolio with:\r\n54% stock, 42% bonds, and 4% cash. The associated benchmark index is as follows:\r\n• Cash: Ibbotson U.S. 30-day Treasury Bills.\r\n• Bond: Ibbotson Intermediate-Term Government Bonds – Total Return.\r\n• Stock: S&P 500 – Total Return.\r\n\r\nThe Three Stages of a CAPEX Evaluation\r\n\r\nTo evaluate a performance analysis of a dividend stock like PEP, a qualified financial planner can use the\r\nannualized return to compare with benchmarks, such as S&P 500. However, an unbiased evaluation using\r\nCAPEX can help businesses and investors avoid emotional financial decisions or behaviors when evaluating\r\nshort-term rental property investment. Businesses often use CAPEX to assess if one should buy, upgrade, or\r\nrenovate projects that have a long, useful life (more than one year), such as a real estate building, machine,\r\ntools, or software. For retirees in particular, taking the emotion out of investment decisions could help mitigate\r\nunrecoverable retirement resource risks later in life. For Matt and Rosie, an unbiased evaluation will assist\r\nthem in determining if short-term rental property investment can meet their retirement goals.\r\nThe process of evaluating a CAPEX project has three stages. The first stage is to forecast five to ten years of\r\n\r\nnet cash flow from the CAPEX project. The second stage is using the annual net cash flow to evaluate select-\r\ned criteria. The third stage is to perform scenarios analysis. The results allow the investors to have unbiased\r\n\r\nexpected return comparisons with different types of investment such as short-term rental property investment.\r\nSage\r\n\r\n\r\nSage Business Cases\r\n\r\nPage 6 of 19 Retirement Income: The Case of Direct Investment in Short-Term Rental\r\nProperty Compared to a Dividend Stock\r\n\r\nStage 1: Forecast Five to Ten Years of Net Cash Flow From CAPEX Project\r\n\r\nForecasting five to ten years of the net cash flow involves three steps:\r\n• Determine the initial cash outlay.\r\n• Determine the operational net cash flow.\r\n• Determine the terminal value of the investment\r\n\r\nDetermine Initial Cash Outlay\r\n\r\nThe initial cash outlay is equal to the costs associated with up-front expenses necessary to make the short-\r\nterm rental operational. The costs may include the property’s purchase price, real estate closing costs, possi-\r\nble renovation or upgrade of the property, initial marketing costs, and/or working capital. The initial cash outlay\r\n\r\nis denoted as year 0 in Table 1 on Excel 1. Matt and Rosie agreed to use USD 500,000 as the purchase price\r\nto assess the short-term rental property investment viability.\r\n\r\nDetermine the 10-Year Operational Net Cash Flow\r\n\r\nTangle assets that have more than one year useful life use a depreciation table to deduct the expenses. Most\r\nresidential rental property tends to depreciate over 27.5 years (IRS, 2020). However, investors may not hold\r\n\r\nthe property for perpetuity. For the evaluation, 10 years of the operational cash flow will suffice. The opera-\r\ntional net cash flow line items are included in Table 1, which takes into consideration the costs of vacancy\r\n\r\nand management fees to determine the net revenue. Depreciation (straight line or double-declining method),\r\ninterest expenses, and income taxes are subtracted from the net revenue to arrive at net income. However,\r\n\r\nthe net income does not represent the real cash movement. Therefore, principal payments must be subtract-\r\ned while non-cash items, such as depreciation, determine net cash flow from the project for one year.\r\n\r\nTable 1. Operational Net Cash Flow for One Year\r\nPotential Revenue a\r\nSage\r\n\r\n\r\nSage Business Cases\r\n\r\nPage 7 of 19 Retirement Income: The Case of Direct Investment in Short-Term Rental\r\nProperty Compared to a Dividend Stock\r\n\r\nThe costs in vacancy (when the property is not being rented) and the property management fee are two major\r\nexpenses or reductions from the potential revenue of short-term rental income. Both the vacancy rate and\r\nmanagement fee fluctuate based on the local rental activities. In 2018, the size of the vacation rental market\r\nin Hawaii was estimated at USD 1.4 billion (HTA, 2020b). From this same report, the ADR for a vacation rental\r\nwas listed at USD 262 per night compared with a USD 278 ADR for a hotel during the same timeframe. This\r\n\r\nLess vacancy or turnover b\r\n\r\nLess management fee c\r\n\r\n= Net Revenue d = a − (b + c)\r\n\r\nLess depreciation e\r\n\r\n= Income from Operations f = d − e\r\n\r\nLess interest expense on loan g\r\n\r\n= Taxable Income h = f − g\r\n\r\nLess income taxes i\r\n\r\n= Net Income j = h − i\r\n\r\nLess principal payments k\r\n\r\nAdd back depreciation e\r\n\r\n= Net Cash Flow from Project l = j – k + e\r\nSage\r\n\r\n\r\nSage Business Cases\r\n\r\nPage 8 of 19 Retirement Income: The Case of Direct Investment in Short-Term Rental\r\nProperty Compared to a Dividend Stock\r\n\r\nless expensive rate, coupled with travelers’ trending preference for vacation rental properties, will only lead to\r\nan increased demand for the rental properties.\r\nBesides considering ADR collected from renters, one must consider the occupancy percentage. For a single\r\nproperty rented by only one party, the occupancy percentage is calculated by dividing the number of nights in\r\na time period that were rented by the total number of nights in the same time period in the geographic area.\r\nHawaii has historically had higher hotel occupancy rates versus mainland United States. In 2019, the hotel\r\noccupancy rate for Hawaii was 81.2% (HTA 2020a) compared with a national U.S. occupancy rate of 66.2%\r\n(STR, 2020). Only New York City and San Francisco maintained a higher occupancy rate in 2019.\r\n\r\nFor absentee owners, full-service property management companies are contracted to rent the property, com-\r\nmunicate with guests, and maintain and clean the property. While the structure of these firms’ fees to the\r\n\r\nowners may vary, most common property management costs range from 20% to 40% of the monthly rental\r\nrevenue (iGMSTM, 2020). According to rented.com (2021), the average maintenance fee in the United States\r\nis 28%, but may be slightly higher in beach and mountainous locations. The effectiveness of the property\r\nmanagement company to advertise the rental and optimize rental pricing and occupancy is also important. In\r\nAirDNAs listing of top property management companies, occupancy ranged between 54% to 70%, and ADR\r\nranged from USD 277 to USD 738 (AirDNA, 2021).\r\nTax liabilities for the CAPEX project include local property taxes and federal and state entity income taxes.\r\nThe property tax at the local level involves a commercial real estate rental concept of “triple net lease” (TNN),\r\nwhere the tenant is responsible for real estate property tax, property insurance, and maintenance. To simplify\r\nthe CAPEX process, authors assume the short-term rental investment will mimic the TNN concept. Hence\r\nthe property tax, insurance, and maintenance are part of the revenue (are included in the costs charged to\r\nthe tenant) that the tenant pays. For the federal and state entity income tax, the authors are using 21% tax\r\npercentage, which is current at the time of this writing, plus the Hawaii state entity income tax at 6.4% for a\r\ntotal of 27.4%.\r\n\r\nDetermine Terminal Cash Flow\r\n\r\nIn a direct real estate investment, the terminal cash flow is based on the assumption that the owners will sell\r\nSage\r\n\r\n\r\nSage Business Cases\r\n\r\nPage 9 of 19 Retirement Income: The Case of Direct Investment in Short-Term Rental\r\nProperty Compared to a Dividend Stock\r\n\r\nthe property at the end of the project cycle (10 years in this case). In general, owners expect their direct real\r\nestate investment to appreciate over the project duration. Several methods can be used to determine a sales\r\n\r\nvalue, but to simplify the sales value, this case uses the perpetual value method. Equation 1 is used to deter-\r\nmine the sales value. (The last project year’s net cash flow value comes from Table 3.) Equation 2 shows the\r\n\r\ncalculation of the Cap Rate. Table 2 shows the line item for the terminal cash flow.\r\nSales value =\r\n\r\nLast project year net cash flow (Table 3, line item l)\r\n\r\nCap Rate\r\nCap Rate = Expected Required Return − Growth Rate\r\n\r\nTable 2. Terminal Cash Flow\r\n\r\nSales Value (Year 10 perpetual value) a (Equation 1)\r\n\r\nOriginal loan b\r\n\r\nLess principal payments c\r\n\r\n= Outstanding loan balance d = b − c\r\n\r\n= Cash after loan payoff e = a − d\r\n\r\nBasis & Taxable Gains (or Loss)\r\n\r\nCost basis f\r\n\r\nLess accumulated depreciation g\r\n\r\nTaxable gain (or loss) h = e − (f − g)\r\n\r\nTax rate on long-term capital gain i\r\n\r\nSage\r\n\r\n\r\nSage Business Cases\r\n\r\nPage 10 of 19 Retirement Income: The Case of Direct Investment in Short-Term Rental\r\nProperty Compared to a Dividend Stock\r\n\r\nIn Table 2, the terminal net cash flow determines capital gains that reduce the property sales value with total\r\nprincipal payments and accumulative depreciation. The year 10 net operating cash flow excludes tenth year’s\r\ninterests and principles from the debt services (Table 3).\r\n\r\nLess taxes on gain (or loss) j = h × i\r\n\r\n= Net cash flow from sale k = h − j\r\n\r\nTable 3. Year 10 Operational Net Cash Flow\r\nPotential Revenue a\r\n\r\nLess vacancy or turnover b\r\n\r\nLess management fee c\r\n\r\n= Net Revenue d = a − (b + c)\r\n\r\nLess depreciation e\r\n\r\n= Income from Operations f = d − e\r\n\r\nLess interest expense on loan g = 0 (none)\r\n\r\n= Taxable Income h = f − g\r\n\r\nLess income taxes i\r\n\r\n= Net Income j = h − i\r\nSage\r\n\r\n\r\nSage Business Cases\r\n\r\nPage 11 of 19 Retirement Income: The Case of Direct Investment in Short-Term Rental\r\nProperty Compared to a Dividend Stock\r\n\r\nStage 2: Evaluating CAPEX Project in NPV, MIRR, EVA, & Discounted Payback Period\r\n\r\nTen years net cash flow was determined in Stage 1. The best way to factor time value of money into evaluating\r\na 10-year CAPEX project net cash flow is to perform a calculation of net present value (NPV). In addition to\r\n\r\nNPV, there are four additional evaluation factors to consider that includes internal rate of return (IRR), modi-\r\nfied internal rate of return (MIRR), economic value added (EVA), and discounted payback period.\r\n\r\nRequired Return on Capital or Discount Rate\r\n\r\nMost entities use the weighted average cost of capital (WACC) to measure the required return on capital or\r\ndiscount rate. The WACC is an opportunity cost (AMA, 2016). The opportunity costs would have been paid\r\nout to the entity’s shareholders if it did not consume the capital (or fund) to create the assets in generating the\r\nnet operating cash flow. However, for this case study, individual investors may use the cost of debt if there is\r\nno equity consideration of the capital.\r\n\r\nNet Present Value\r\n\r\nNet present value equals the present value of the net cash flows over the life of the CAPEX project minus the\r\ninitial cash outlay (AMA, 2016). Ideally, investors like to see a positive NPV or a larger amount of the NPV\r\nwhen comparing projects.\r\n\r\nLess principal payments k = 0 (none)\r\n\r\nAdd back depreciation e\r\n\r\n= Net Cash Flow from Project l = j – k + e\r\nSage\r\n\r\n\r\nSage Business Cases\r\n\r\nPage 12 of 19 Retirement Income: The Case of Direct Investment in Short-Term Rental\r\nProperty Compared to a Dividend Stock\r\n\r\nInternal Rate of Return\r\n\r\nThe IRR essentially sets NPV to zero to determine the rate in the cost of the project (AMA, 2016). Investors\r\nprefer to have a positive IRR or large percentage when comparing projects. The higher IRR suggests a higher\r\nreturn on the project.\r\n\r\nModified Internal Rate of Return\r\n\r\nAlthough IRR is a quick analysis to determine the return of the CAPEX project, most investors use their net\r\ncash flow from operations to invest in another project. Hence, controlling the reinvestment rate of the IRR\r\nresults in MIRR (AMA, 2016). Like IRR, MIRR is preferred to be a positive percentage or larger percentage\r\nwhen comparing projects.\r\n\r\nEconomic Value Added\r\n\r\nEconomic value added is equal to the required return on capital minus the modified internal rate of return or\r\ndiscount rate minus MIRR (AMA, 2016). Ideally, investors prefer to see a positive EVA unless the project is a\r\nnew product, a new market, or compliance-related and did not expect to have a positive EVA.\r\n\r\nDiscounted Payback Period or DPP\r\n\r\nInvestors like to know the breakeven point, which is when the CAPEX project starts making a profit. Figure 1\r\nillustrates an example of a CAPEX project that initially spent USD 300,000 (Year 0). Each year, the CAPEX\r\nproject earned USD 50,000. The accumulative value by Year 1 is -USD 250,000 (-USD 300,000 + USD\r\n50,000). Year 2 is -USD 200,000 (or year 1 accumulative value of -250,000 + USD 50,000). By Year 6, the\r\naccumulative CAPEX project value is zero (0), which is the breakeven point or the beginning of the payback\r\nperiod.\r\nSage\r\n\r\n\r\nSage Business Cases\r\n\r\nPage 13 of 19 Retirement Income: The Case of Direct Investment in Short-Term Rental\r\nProperty Compared to a Dividend Stock\r\n\r\nFigure 1. Payback Period Example\r\n\r\nHowever, a dollar today is not the same as a dollar tomorrow. The time value of money must be considered\r\nwhen determining the payback period. Hence, using the accumulative present value of the operation net cash\r\n\r\nflow since inception (Year 0) of the CAPEX project, DPP helps investors determine how long the CAPEX pro-\r\nject will take to payback the initial investment. The shorter the DPP, the better the CAPEX project.\r\n\r\nIn recommending go or no-go of a CAPEX project. Investors need to meet three out of the five evaluating\r\ncriteria (NPV, IRR, MIRR, EVA, and DPP) (AMA, 2016).\r\n\r\nStage 3: CAPEX Scenarios Analysis\r\n\r\nFunding of Capital Gains\r\n\r\nTo determine if the short-term rental property investment can meet the client’s retirement income goal (or USD\r\n500 per month), Matt and Rosie should be presented with three scenarios:\r\nSage\r\n\r\n\r\nSage Business Cases\r\n\r\nPage 14 of 19 Retirement Income: The Case of Direct Investment in Short-Term Rental\r\nProperty Compared to a Dividend Stock\r\n\r\n• Scenario A: Clients use the inherent cash of USD 300,000 and sell enough PEP shares (net after-\r\ntax) with no borrowing to meet the USD 500,000 purchase price.\r\n\r\n• Scenario B: Clients use the inherent cash of USD 300,000 and borrow USD 200,000 at an interest\r\nrate of 2.875% 1\r\n\r\nfor 30 years to meet the USD 500,000 purchase price.\r\n\r\n• Scenario C: Clients do not invest in short-term rental but invest the inherent cash of USD 300,000\r\nbased on the suggested allocation.\r\n\r\nStock Performance\r\n\r\nMatt and Rosie reinvest dividends regularly into the same stock. Therefore, using the annual return (Equation\r\n4) of PEP can help them understand the current return compared with short-term rental property investment.\r\nThe following two steps can be used to determine the annual return of a stock.\r\nStep 1: Calculate your simple return percentage.\r\nSimple Return =\r\n\r\n(Current Price − Purchase Price)\r\nPurchase Price\r\nStep 2: Annualize the simple return percentage.\r\nAnnual Return = (Simple Return + 1)\r\n(\r\n1\r\nYears Held)\r\n− 1\r\n\r\nAdditionally, to determine scenario C using the recommended portfolio (cash 4%, stock 54%, bond 42%\r\n\r\nbased on their current risk tolerance), the weighted portfolio return of the USD 300,000 portfolio can be cal-\r\nculated using Equation 5.\r\n\r\nReturnPortfolio =\r\nn\r\n∑\r\ni = 1\r\nweighti* returni\r\n\r\nThe annualized return of PEP and expected portfolio return of scenario C should consider being compared\r\nwith an appropriate index. For example, one can use Morningstar analysis performance report (Johnson,\r\n2021) to assess PEP against the S&P index returns.\r\nSage\r\n\r\n\r\nSage Business Cases\r\n\r\nPage 15 of 19 Retirement Income: The Case of Direct Investment in Short-Term Rental\r\nProperty Compared to a Dividend Stock\r\n\r\nRecommendation on Short-term Rental Investment Oppor-\r\ntunity\r\n\r\nTable 4 is a template for comparing scenarios A, B, and C. You may use this template to present side-by-side\r\nscenario comparisons for Matt and Rosie to easily compare which scenario will best meet their retirement\r\n\r\nincome goal of USD 500 per month. Use the preceding instructions to calculate the expected retirement in-\r\ncome.\r\n\r\nOther Risks to Consider\r\n\r\nStocks are subject to systematic and unsystematic risks (Dalton & Forjan, 2019), and it is prudent to diversity\r\n\r\nthe unsystematic risk. Rental property investments also face many risks. A management company can mit-\r\nigate some risks, but rental property investments are subject to other risks, such as macroeconomic condi-\r\ntions, policy changes, such as those enacted in response to COVID-19 pandemic (U.S. Department of the\r\n\r\nTreasury, 2021), and/or travel restriction. Most importantly, many retirees need to weigh the stress of rental\r\nproperty upkeep. The clients need to take all of these additional risks into consideration.\r\n\r\nTable 4. Scenario Comparisons (USD)\r\n\r\nScenario A Scenario B Scenario C\r\n\r\nShort-term rental investment Yes Yes No\r\n\r\nFunding 1) cash 300,000 300,000 300,000\r\n\r\nFunding 2) sell PEP 200,000 n/a n/a\r\n\r\nFunding 3) 30-year mortgage n/a 200,000 n/a\r\n\r\nEvaluation criteria & expected retirement income (or net cash)\r\nSage\r\n\r\n\r\nSage Business Cases\r\n\r\nPage 16 of 19 Retirement Income: The Case of Direct Investment in Short-Term Rental\r\nProperty Compared to a Dividend Stock\r\n\r\nDiscussion Questions\r\n\r\n1. What are the assumptions to use and why for the CAPEX analysis?\r\n2. What are the evaluation criteria results in scenarios A, B, and C?\r\n3. What are your retirement income recommendations for Matt and Rosie? What are alternative options,\r\nif any?\r\n4. What other risks should Matt and Rosie consider?\r\n

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