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Do you use NPV and IRR Calculations

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Fortuneinvesting

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How many of you guys use NPV (net present value) and IRR (internal rate of return) to check that your investments are worthwhile.
I have been doing this with all of my property analysis using the DP as the initial investment and cash flow - expenses as the cash flows for each year and equity (not any valuation to be conservative) as the final cash flow.

My goal is 10% and I don`t consider anything under 10%. Basically this leaves me with properties under 290,000 with a assessed value (tax purposes) of 300,000 max.
 
QUOTE (Fortuneinvesting @ Apr 21 2009, 09:55 PM) How many of you guys use NPV (net present value) and IRR (internal rate of return) to check that your investments are worthwhile.
...
Why does NPV make sense ? NPV of what future value ?? Using what interest rate to discount future equity/cash-flow? 2% 5% 12% 18%

IRR does .. and we use it .. but key are assumptions: rent growth, vacancies, CAP rates in 5 years, mortgage interest rate in 5 years, .. many a property that looks great on a spreadsheet look different in real life 3 years later .. some better .. some worse ..
 
QUOTE (thomasbeyer2000 @ Apr 21 2009, 10:19 PM) many a property that looks great on a spreadsheet look different in real life 3 years later .. some better .. some worse ..

I agree with you 100% there. Not everything pans out the best in life.

I use NPV as a present value of all the future cash flows I expect to receive off an investment (remember that $2000 today is not worth $2000 5 years from now)

Basically I use my net income each year as the cash flow and in the final year i also include what equity is available if I were to sell. Then i determine if it is worth my investment by using the DP as the initial cost. I use 10% as my mark, so a NPV that is positive is more than my 10% goal on my investment.

I find it an easy way to see which properties would be better than other on paper.
 
QUOTE (Fortuneinvesting @ Apr 21 2009, 11:23 PM) I agree with you 100% there. Not everything pans out the best in life.

I use NPV as a present value of all the future cash flows I expect to receive off an investment (remember that $2000 today is not worth $2000 5 years from now)

Basically I use my net income each year as the cash flow and in the final year i also include what equity is available if I were to sell. Then i determine if it is worth my investment by using the DP as the initial cost. I use 10% as my mark, so a NPV that is positive is more than my 10% goal on my investment.

I find it an easy way to see which properties would be better than other on paper.
sure .. but assumptions about vacancies, rent growth and especially property value in 5 years can make this a futile exercise .. hence: ASSUMPTIONS are key .. not the model !
 
IRR and NPV are more often used by the "big boys", such as Thomas, who invest in much larger properties. It is a sophisticated calculation, that unless you understand what IRR means, is useless.

For smaller investors, calculating the average annual rate of return is sufficient. What we are looking for in either process is a gauge by which the property can be measured.

If you use a real estate analysis program, such as REMA and others, that automatically calculates IRR and NPV, then use it. If you know how to use Excel to calculate both, then use it. (As savvy as I think I am with Excel, I have never been able to calculate IRR accurately using it.)

BUT, if you do not know how to calculate IRR and NPV, then don`t worry about it. You are not missing anything.
 
QUOTE (Dan_Eisenhauer @ Apr 22 2009, 11:37 AM) If you use a real estate analysis program, such as REMA and others, that automatically calculates IRR and NPV, then use it. If you know how to use Excel to calculate both, then use it. (As savvy as I think I am with Excel, I have never been able to calculate IRR accurately using it.)


I wouldn`t recommend using REMA until the program is able to come up with ability to impliment marginal tax rate and capital cost allowance - unless you feel comfortable living in a world where you can not accurately calculate cash flow.

Using IRR is great - you can calculate your real estate investment to a competing investment. An IRR after tax, even better. Without knowing the tax consequences, though, you are spinning your wheels.

Landlord Cash Flow Analyzer Pro (Canadian Version) is what I use.

Mike
 
QUOTE (MikeMilovick @ May 19 2009, 09:25 AM) I wouldn`t recommend using REMA until the program is able to come up with ability to impliment marginal tax rate and capital cost allowance - unless you feel comfortable living in a world where you can not accurately calculate cash flow.

Using IRR is great - you can calculate your real estate investment to a competing investment. An IRR after tax, even better. Without knowing the tax consequences, though, you are spinning your wheels.

Landlord Cash Flow Analyzer Pro (Canadian Version) is what I use.

Mike

Wouldn`t any tax implications be dependent on the overall picture of whatever entity actually holds the property? No way am I going to let any software program tell me what is the best property for my portfolio based on it`s interpretation of my tax situation.

Also, wouldn`t the taxation be the same regardless of what property you picked? It is just income vs. expenses...

Would love to see an example of how two properties with similar price, revenue and expenses could in fact have drastically different impacts on your bottom line simply based on tax.

Buy the best property for cash flow, location and future costs.. Don`t overthink it by trying to do your taxes at the same time. Just my $0.02.
 
Brett - "To competing investments" You can also buy public company shares, or bonds, or a hot dog stand, or ... etc..


QUOTE (RedlineBrett @ May 19 2009, 12:36 PM) Wouldn`t any tax implications be dependent on the overall picture of whatever entity actually holds the property? No way am I going to let any software program tell me what is the best property for my portfolio based on it`s interpretation of my tax situation.

Also, wouldn`t the taxation be the same regardless of what property you picked? It is just income vs. expenses...

Would love to see an example of how two properties with similar price, revenue and expenses could in fact have drastically different impacts on your bottom line simply based on tax.

Buy the best property for cash flow, location and future costs.. Don`t overthink it by trying to do your taxes at the same time. Just my $0.02.
 
QUOTE (housingrental @ May 19 2009, 11:04 AM) Brett - "To competing investments" You can also buy public company shares, or bonds, or a hot dog stand, or ... etc..

Can definitely see this mattering when contrasting different investment options. But expecting REMA - a real estate software program - to tell you to buy this house over this stock isn`t really being fair...

IRR, ROR or ROCE are better metrics for this type of thing. In fact the whole purpose of those metrics is to allow potential investors to compare apples to apples.

Problem is being able to wade through all the underlying assumptions each company/investment option is using to arrive at their number and also be able to interpret their validity in different industries. Not an easy thing to do... which is why I don`t do stocks!
 
In talking with Garth Chapman about the lack of tax calculations, they have deliberately left taxes out of REMA because they are too variable and personal... AND most of us have no idea what we are doing when it comes to analyzing the tax implications of a deal.

The IRR result in REMA, therefore, is a Before Tax IRR. As long as anyone using the program understands that, it is great analytical tool. Most more sophisticated programs have a Before Tax and After Tax result. REMA just does not show the After Tax result.
 
You do have a reasonable point. Same re Dan`s
QUOTE (RedlineBrett @ May 19 2009, 01:17 PM) Can definitely see this mattering when contrasting different investment options. But expecting REMA - a real estate software program - to tell you to buy this house over this stock isn`t really being fair...

IRR, ROR or ROCE are better metrics for this type of thing. In fact the whole purpose of those metrics is to allow potential investors to compare apples to apples.

Problem is being able to wade through all the underlying assumptions each company/investment option is using to arrive at their number and also be able to interpret their validity in different industries. Not an easy thing to do... which is why I don`t do stocks!
 
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