All Forum Posts by: Michael W.

Thanks for the great responses. Frank, those articles are really good. They capture why I am using DCF as my primary approach to evaluating my options.

Thanks again for the thoughts.

I agree with you on the IRR as a reference, I use the NPV as an absolute cash value for my primary decision guidance. Just easy to compare to lump sums and say "gee, which one is bigger".

I think adding in the tax shields is important, because you are eliminating a part of the favorable cash flow perspective of real-estate. I believe that margin is really the important part, so taking that tax shield into your calculations gives you absolute clarity that could enable you to offer just a smidge more to close a deal.

That's my theory anyway...

Done. I look forward to connecting.

Bill thanks for the info. I'm using NPV with a WaaC based on the financing ratio on the property (so I'll always have some cash down in this model).

I've been using a general approach that evaluates the NPV and IRR over a 15 year time horizon, but also includes a requirement that the deal be reasonably profitable in a 5 year time horizon (giving me more exit options).

For the deal we couldn't strike, the floor had to be replaced and the roof was going to need to be replaced by year 5. Those two factors changed the deal shape so much that we couldn't find a price with the buyer. We had gone forward with inspection assuming a roof at some point after 10 years, but with that shift in the cash flows the impact was significant and lowered what we could offer by more than the seller was willing to go with.

It was an important moment for us, as we realized just how important the early year projections are when you have no time to accumulate cash from the property income.

I'm moving this post from the general forum to this forum, I think it's more applicable here.

We are in the process of buying our first investment home. When I say in the process, I mean we have secured lending, have evaluated and attempted purchase of 1 candidate (couldn't close the deal) and are now moving on to another candidate that we like.

I've been reading around the forums about some of the financial evaluations and am working to understand why Net Present Value of free cash flows is not being used more in the evaluation of a property.

It is interesting to understand the CoC as an income statement percentage and it is certainly interesting to do some quick calculations with perhaps the 50% rule.

But until you take a series of cash flows, discount them by a Weighted Average Cost of capital, and determine if you can clear your next best alternative (stock market, paying down debt), how do you know if you really have a something that will make you money?

For me Free Cash Flow is the total actual dollars available after all expenses, mortgage payment, and accounting for the interest and depreciation tax shields. That bottom line is cash that I'm getting for whatever I put into the property in year zero.

In one of the properties the difference between replacing a roof in year 5 and replacing it in year 10 on the NPV was significant enough that it kept the deal from closing.

What is the opinion on using NPV and free cash flows to evaluate properties?

We are in the process of buying our first investment home. When I say in the process, I mean we have secured lending, have evaluated and attempted purchase of 1 candidate (couldn't close the deal) and are now moving on to another candidate that we like.

I've been reading around the forums about some of the financial evaluations and am working to understand why Net Present Value of free cash flows is not being used more in the evaluation of a property.

It is interesting to understand the CoC as an income statement percentage and it is certainly interesting to do some quick calculations with perhaps the 50% rule.

But until you take a series of cash flows, discount them by a Weighted Average Cost of capital, and determine if you can clear your next best alternative (stock market, paying down debt), how do you know if you really have a something that will make you money?

For me Free Cash Flow is the total actual dollars available after all expenses, mortgage payment, and accounting for the interest and depreciation tax shields. That bottom line is cash that I'm getting for whatever I put into the property in year zero.

In one of the properties the difference between replacing a roof in year 5 and replacing it in year 10 on the NPV was significant enough that it kept the deal from closing.

What is the opinion on using NPV and free cash flows to evaluate properties?

Hi my name is Michael. My wife and I live on a small ranch with our four children, 5 dogs, and way too many horses. This will be our second business, in addition to my regular day job as a software company executive. Our first business operates as an Equine Assisted Learning and Therapy center called The Equine Discovery Center, we are one year into that venture. I have experience with software startups, so I'm very entrepreneurial and I have an MBA from Washington University in St. Louis, so I also have formal business training.

Our interest in real estate began as a cost savings and tax advantage recommendation from our accountant for housing our college aged children. As we did the research and took our time to understand the opportunities, our entrepreneurial nature got excited about the potential. The balance of risk and return is attractive to my wife and putting our money to work is attractive to me. We are looking for our first property, with the goal of having two in the next 8-12 months.