What is Value?

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# What is Value? - PowerPoint PPT Presentation

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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## PowerPoint Slideshow about ' What is Value?' - talon-bennett

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Presentation Transcript
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
• Sources of Return from RE Investing
• Valuation Concerns
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)
• Definition -

FVn = PV(1 + i)n

1

2

0

N

FV = ?

PV=x

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)
• Definition -

0

1

2

N

A

A

A

FVA = ?

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

0

1

2

N

i%

A

A

A

Annuity Due

0

1

2

N

i%

A

A

A

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
• 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)
• Definition -

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

1

2

0

N

FV = x

PV= ?

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)
• Definition -

0

1

2

N

A

A

A

PVA = ?

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
• 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
• 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
• 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
• 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)
• Definition –
• NPV for Turtle Beach Townhouses
• NPV for Vermont Vacation Villas
• Decision Rules:
• Independent Projects –
• Mutually Exclusive Projects –
Internal Rate of Return (IRR)
• Definition –
• IRR for Turtle Beach Townhouses
• IRR for Vermont Vacation Villas
• Decision Rules:
• Independent Projects –
• Mutually Exclusive Projects –

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?
• Cross-over Rate
Pricing Floating-Rate Securities
• Floaters –
• Pricing Determinants:
• Implications of Pricing Determinants:
Pricing Inverse-Floating Rate Securities
• Inverse Floaters –
• Pricing Determinants:
• Example: