All Forum Posts by: John K.

Hi everybody!,

tomorrow I will be sending in my offer for an investment five-unit property with a seller's financing. Even though I bought a few properties already, never with a sellers financing.

I know how big down payment I can afford (20-40%) and I have also done my real estate analysis to calculate what would be the best terms for me (interest, amortization period, down payment) - which had the highest NPV.

However my real estate agent told me, that I shouldn't be putting these options in the initial offer, instead I should let the seller to come up with his terms first and then negotiate those.

Is this normal strategy? Or do you you propose your financing terms in the offer?

Hi Joshua,

great job with the updates and with the site in general.

I am glad that the "View All" button is there, since I like to go through the categories, when I need information just for certain topic.

Second note - for me as well as for Vikram, the Advanced Reply has really tiny font in the text area. I am using Chrome 6.0 on PC. You can see the snapshot. Hope it helps. Keep up the good work and thanks!

Thanks for the answers everybody! It is really interesting to hear the opinions.

Anyway, even though it seems that most of you prefer IRR, if you are using NPV, what do you usually use as a discount rate? What do you think is the best way to determine it?

I agree that the determining the discount rate (cost of capital) can be pretty difficult in real estate. When I do the NPV analysis, I use discount rate as a rate I could probably earn on similar risky investment (ie. on financial markets). Even though it is not that exact, using CAPM (Capital Asset Pricing Model) as a discount rate didn't work much for real estate.

How are you guys determining the discount rate in your calculations?

In my opinion, if I keep my method of determining the discount rate consistent, I can still compare various properties (investments).

I also agree that NPV can't be the only measurement of an investment. The same thing is valid for IRR, though.

IRR doesn't take in account much the size of the initial investment needed. If there would be two investments, generating both 10% IRR, one can have initial investment of $10K and one $100K and you can't tell just from looking at IRR.
For this reason also Profitability Index is a good calculation, in my opinion.
Profitability index = (Present Value of Future cash flows) / Initial investment

Anyway, you are right as well that calculations is one thing, but then you have to access the investment with common sense and guts to make the final decision. However lot of "investors" are using just the guts and no calculations, which is bad as well.

I am not sure how do you mean the influence of the inflation in the NPV calculation.
I am using this formula:

... where the i is a discount rate, t is the year and CFt Cash flow in that year.

In my opinion the influence of inflation isn't included in the NPV formula, but let me know.

Even though Net Present Value is used mainly in financial management I think it is probably the best ratio/calculation for analyzing a real estate deal. Unfortunately in Real Estate Analysis people usually use mainly return on investment or cash on cash return. These ratios are described in many books, but they don't take in count the time value of money and therefore NPV makes much more "real" picture of the investment.
I learned to use NPV and IRR back at the university and also in the book by Frank Gallinelli : What Every Real Estate Investor Needs to Know about Cash Flow... And 36 Other Key Financial Measures.
There is lot of successful investors at this forum, so I am interested what is everybody using in their Real Estate analysis? What are your opinions on NPV in Real Estate?

PS. This forum is great!

John

Thanks for the link!