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What is Value?. “In general, the value of a parcel of real estate is the present value of the expected future benefits associated with ownership of the property right.”. Market Value vs. Investment Value. Market Value – Investment Value –. Basic Valuation Concepts.

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what is value
What is Value?

“In general, the value of a parcel of real estate is the present value of the expected future benefits associated with ownership of the property right.”

market value vs investment value
Market Value vs. Investment Value
  • Market Value –
  • Investment Value –
basic valuation concepts
Basic Valuation Concepts
  • Sources of Return from RE Investing
  • Valuation Concerns
time value of money operations
Time-Value of Money Operations
  • Future Value
  • Future Value of an Annuity
  • Sinking Fund Factor
  • Present Value
  • Present Value of an Annuity
  • Mortgage Constant
future value fv
Future Value (FV)
  • Definition -

FVn = PV(1 + i)n

1

2

0

N

FV = ?

PV=x

future value
Future Value
  • Ex. Suppose you buy a tract of undeveloped land in rural Texas for $200,000. If the parcel appreciates at an annual rate of 4%, how much will you be able to sell the land for in twelve years?
future value of an annuity fva
Future Value of an Annuity (FVA)
  • Definition -

0

1

2

N

A

A

A

FVA = ?

future value of an annuity
Future Value of an Annuity
  • Ex. If you received $25,000 per year from operating an income producing property, how much would you have after 10 years assuming the opportunity cost of capital (i.e., discount rate) is 9%?
ordinary annuity vs annuity due
Ordinary Annuity vs. Annuity Due

Ordinary Annuity

0

1

2

N

i%

A

A

A

Annuity Due

0

1

2

N

i%

A

A

A

future value of an annuity due
Future Value of an Annuity Due
  • Ex. If you received $25,000 per year, in advance, from operating an income producing property, how much would you have after 10 years assuming the opportunity cost of capital (i.e., discount rate) is 9%?
sinking fund payment
Sinking Fund Payment
  • Definition:
      • Ex. Suppose you plan on buying a house in 5 years at an expected purchase price of $250,000. You plan on financing the house via a mortgage which requires a 20% ($50,000) down payment. If you currently have no savings, and the discount rate is 7%, how much should you set aside each year in equal installments to satisfy your down payment requirement?
present value pv
Present Value (PV)
  • Definition -

PV = P0 = FV / (1 + i)n

1

2

0

N

FV = x

PV= ?

present value
Present Value
  • Ex. How much would you be willing to pay for a tract of land that you expect to be able to sell in five years, for $50,000, if the discount rate is 8%?
present value of an annuity pva
Present Value of an Annuity (PVA)
  • Definition -

0

1

2

N

A

A

A

PVA = ?

present value of an annuity
Present Value of an Annuity
  • Example: How much should you be willing to pay for an income producing (rental) property that provides expected after-tax cashflows of $10,000 per year for the next 10 years, if the discount rate is 8.5%?
present value of an annuity due
Present Value of an Annuity Due
  • Example: How much should you be willing to pay for an income producing (rental) property that provides expected after-tax cashflows of $10,000 per year for the next 10 years, with payments made at the beginning of the year, if the discount rate is 8.5%?
tvm properties
TVM Properties
  • Future Values
      • An increase in the discount rate
      • An increase in the length of time until the CF is received, given a set interest rate,
  • Present Values
      • An increase in the discount rate
      • An increase in the length of time until the CF is received, given a set interest rate,
  • Note: For this class, assume nominal interest rates can’t be negative!
mortgage constant
Mortgage Constant
  • Definition:
      • Ex. Suppose you borrow $200,000 to purchase a home. The 15-year loan requires monthly payments, and has a stated nominal interest rate (APR) of 6%. What is the mortgage constant (Rm) on this loan, and what is the required monthly payment?
amortization
Amortization
  • Loan Amortization Schedules
    • Ex. Consider a $200,000, 15-year, fixed-rate monthly payment mortgage with a contract interest rate of 6%.
        • What is required monthly payment of this loan?
        • After 5 years, what is the remaining mortgage balance?
        • During the first year, what is the fraction of the total payments that go toward satisfying accrued interest obligations?
        • What is the total amount of interest paid over the life of this loan?
net present value npv
Net Present Value (NPV)
  • Definition –
      • NPV for Turtle Beach Townhouses
      • NPV for Vermont Vacation Villas
        • Decision Rules:
          • Independent Projects –
          • Mutually Exclusive Projects –
internal rate of return irr
Internal Rate of Return (IRR)
  • Definition –
      • IRR for Turtle Beach Townhouses
      • IRR for Vermont Vacation Villas
        • Decision Rules:
          • Independent Projects –
          • Mutually Exclusive Projects –
slide23

Capitalization Rate (R)

  • Definition –
      • Capitalization Rate (R) for Turtle Beach Townhouses
      • Capitalization Rate (R) for Vermont Vacation Villas
        • Problems:
          • Independent Projects –
          • Mutually Exclusive Projects –
        • Conclusion:
point of indifference
Point of Indifference?
  • Cross-over Rate
pricing floating rate securities
Pricing Floating-Rate Securities
  • Floaters –
    • Pricing Determinants:
    • Implications of Pricing Determinants:
pricing inverse floating rate securities
Pricing Inverse-Floating Rate Securities
  • Inverse Floaters –
    • Pricing Determinants:
    • Example:
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