Net present value (NPV) is a return routinely used by real estate investors during a real estate analysis to gauge the profitability of a real estate investment because it does account for time value of money – that is, it accounts for the present value of future receipts anticipated from the investment.
What is NPV?
Net present value is the difference (expressed as a dollar amount) between the present value of all future cash flows discounted at the desired rate of return and the amount of cash investment.
How to Compute
To make the NPV calculation you will need a financial calculator like HB10B, an Excel spreadsheet, or a calculation solution like iCalculator. It is not something you can calculate in your head.
Say you want a 6.25% rate of return to invest $100,000 for a property projecting annual cash flows of 2,000, 2,300, 2,500, 2,800, 3,000, plus cash proceeds of 130,000 anticipated from a future sale. Your intention is to calculate the net present value in order to know whether this real estate investment will meet your desired goal.
- HP Financial Calculator – Refer to the owner’s manual. Requires about twelve keystrokes and entries.
- MS Excel – NPV(A1,A3:A7)+A2 where A1 is rate, A3:A7 are the cash flows, A2 is the initial investment.
- iCalculator – discussed below.
Allow me to show you a much easier way using my iCalculator solution. Just fill in the form and click. (Click image to enlarge).
The net present value we calculated based upon the projected cash flows given for the rental property in our example resulted in a positive dollar amount. Therefore your desired rate of return of 6.25% was exceeded.
Have you been considering the idea of working with rental income property and how it can benefit your real estate business? Perhaps you’re a real estate agent with opportunities to list rental properties owned by existing customers, or a real estate investor who has been kicking around the idea of investing in real estate maybe for retirement.
But you have never worked with income property and created a real estate analysis so you are somewhat timid about jumping in and getting involved. Fair enough. We’ve all been there.
The good news is that you don’t have to become an investment expert to work with income property, and you can create a complete real estate analysis on any-size real estate investment property at your fingertips today – quickly, easily, concisely!
ProAPOD real estate investment software is the product I developed in 2000 after thirty years of professional real estate investing experience in order to provide the real estate community with a user-friendly software that can be used by anyone – novice or expert; powerful enough to do the type of analysis investment experts require; affordable enough for the most prudent budget.
As a result, ProAPOD continues to be the real estate analysis software of choice by real estate investors, agents and analysts nationwide. So you will be in good company by selecting one of our software solutions to assist you with your individual real estate investment goals and objectives.
So You Know
ProAPOD provides three affordable software solutions to satisfy whatever your budget or objective. You can select the rock-solid essentials in Agent 6 analysis and marketing, deep-level analysis functions in Investor 8, or the deepest-level analysis and marketing functions in Executive 10.
You can learn more about the benefits of ProAPOD Real Estate Investment Software at www.proapod.com
Novice real estate investors routinely make the mistake of investing in a rental property based upon performance numbers given them by a real estate broker or seller.
However, this is not a good policy for the investor because rental property performance numbers can be skewed – even when it’s not intentional.
Bear in mind that most real estate analysis presentations are created by brokers and sellers who characteristically tend to be over-optimistic about the rental property’s cash flows and rates of return. As a result, the property valuation they present to investors often tend to reflect a “bottom line” that is more “pie-in-the-sky” than realistic.
Whereas experienced investors are typically able to discern and make corrections for unrealistic numbers, most novice real estate investors are not. Therefore they might inadvertently invest in a rental property property based on these faulty numbers only to discover later that the rental property is not as profitable as believed.
This of course is not good. However it can be prevented, and in this article I’m going to explain how.
How to Validate the Numbers
The solution for novice real estate investors is really quite simple.
Make a minimal investment in a real estate investor software solution so you can create your own real estate analysis. This way you can enter the property’s income and operating expense data based upon your own assumptions and determine first-hand what the cash flows, rates of return, and profitability are likely to be.
This not only can protect you from over-paying on a real estate investment, the reports created based upon your assumptions can be presented to the seller and used to perhaps negotiate a purchase price more in your favor.
A quality real estate investing software solution is not difficult to use (even for a novice) and it can purchased at an affordable price. So it really is worth serious consideration for novice real estate investors planning to engage in real estate investing.
So You Know
ProAPOD does provide a real estate investor software solution especially-developed for novices. In addition to a wide-range of cash flow and profitability presentations, it includes a formula-learning feature with over thirty real estate investment formulas.
The latest consumer price index has been added to iCalculator – ProAPOD’s online real estate calculator solution. This means that you are able to compute the inflation rate starting in any year from as far back as 1913 through September 14, 2012.
For example, the calculator will reveal that a $20 expenditure for goods and services in 1913 will now cost you $456.41 in 2012 – a rate of inflation increase of 2227.1%.
This is a free update. So if you are a current user of iCalculator you will be able to take advantage of this latest update when you use the inflation rate calculator. To access it click Time Value on the toolbar than Inflation Rate.
To learn more about this unique “formula-teaching” online calculator solution and save 64% as our guest go to real estate calculator.
ProAPOD has updated the inflation rate tables in its iCalculator real estate calculator solution.
This means you can make an inflation rate calculation from 1913 thru the latest month for 2012 published by the Consumer Price Index.
This is a free update. So if you are a customer of this online real estate calculator you can simply login from the ProAPOD website and use it.