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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 –


    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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