The average housing price in Metro Vancouver has gone up by ~16% in 2017. Mr.X, a FOMO investor, has $200,000 cash available and wanted to invest in the Metro Vancouver real estate market for 3 years. He is considering three options:

1. Purchase a condominium suite in Downtown Vancouver which currently worth $1,000,000. Mr.X could spend all his cash as the down payment, and apply for a 5% fixed interest rate bank mortgage of $800,000 to payback annually over a period of 25 years. If purchased, Mr.X could immediately rent the suite for $60,000 annually, payable at the beginning of each year. At the start of year 3, Mr.X could sell the suite for $1,500,000 and pay back all remaining debt.

2. Pre-purchase a condominium suite at Metrotown (current price $800,000) which will be completed after 3 years. To claim the ownership upon completion, the condo developer requires Mr.X to pay 5% of the full price right now, 10% of the full price right by the end of year 1, another 10% by the end of year 2, and the remainder 75% after the completion. However, just before the completion, Mr.X could transfer the suite ownership to other buyers for $600,000 (so that the new owner will need to pay the remainder 75% of the money to the developer). Each year Mr. X keeps any remaining of his available cash on-hand and does not invest it.

3. Buy a piece of residential land in Surrey for $600,000. The bank offers Mr.X 8% fixed interest rate mortgage of $480,000 to payback annually over a period of 25 years. Each year, Mr. X invests his remaining cash in mutual funds, yielding 10% annual return, but withdraws the amount annually to make his mortgage payments. After 3 years, Mr.X could sell the land for $1,300,000 and pay back all remaining debt.

In any case, if Mr.X bought mutual funds with the extra cash, they would yield 10% annual return. Assume the first mortgage payment is due at year 1, answer the following questions:

a. Draw the annual cashflow diagrams for all options (9pts)

b. What is the IRR in each option? (9pts)

c. Based on incremental rate of return analysis, which option would you suggest? (7pts)

Bonus: Mr.X could also borrow additional money from a loan shark for up to $1,000,000 at 15% interest rate to pay back annually in 3 years. He also has the choice to pre-purchase up to three condo suites in option 2. If he can do whatever combination of options 1, 2 and 3 with whatever cash he has on-hand, what is the best investment combination and its rate of return? Assume Mr.X could only hold one bank mortgage (between option 1 and 3), but has the option to make one-off payments (completely pay off the house prices immediately for any option.

(15pts, must explain reasonings and show calculations to score full mark