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.
So You Know
iCalculator makes dozens of real estate calculations with the formulas. You can try it risk-free and save 50% (you pay just $24.95). Click here to learn more and get the discount.