Profitable investments open more present opportunities when the net present value of the purchased asset is below the underlying intrinsic value of the asset. Following are the ways to learn and assess the intrinsic value of your income property so that you can capitalize on inefficient market pricing. ()
· Why calculate the intrinsic value
An obligatory exercise of successful real estate investors like Procter and Gamble calculates the intrinsic value to provide funds on inefficient market mispricing. ()
These value investors assess an investment opportunity by considering the relationship between the price and the value. ()
· How to determine the intrinsic value
A conventional practice to determine the intrinsic value of income creating real estate investment assets is to procure the net present value or the present values of the future cash flows. ()
To find the present value, you have to calculate the total of current and future cash flows with every dollar of future cash flow correctly discounted to make allowance for the time value of money.
However, it would help if you take into account that the value of money could never be for perpetuity or an indefinite period.
You can use the interest rate that an investor can earn from a future alternative investment to calculate the discount of the future cash flow from the present values.
· Result value creation strategies
Suppose you are writing a case study on market analysis. In that case, you should consider the result value creation strategies conservatively since it is caused by future cash flows that take because of the forecasting change.
To understand the concept better, let’s rake an example of an investor buying property for $1000000 for cash that has an opportunity for value creation.
Let us also consider that he has found an alternate investment that can yield 7% discounted present value assuming that he will hold the property for four years and then sell it.
The cash flow for the first year is 0, the second year is $50000, the third year is $60000, and fourth-year is $180000 inclusive of all sale proceeds. The calculated net present value of the property will be 1,465,861.
Note that while writing the case study, all the data you use for forecasting future cash flow and sale proceeds should be factual and not an imaginative one.
The above calculation shows that if the discount yield increases from 7% to 13%, the net profit value will reduce to $1,184,714.
The above discussion sheds light on the procedures of calculating an intrinsic value for real estate investments. To obtain the most accurate calculation, you should calculate the replacement cost and the net present value of an investor's investment asset. Source: