Net Present Value (NPV) in Real Estate

Net Present Value is probably the best measure of any investment thanks to its complexity. It takes into account all the future cash flows including the selling price, and it converts all these amounts to their present values using discount rate required by the investor. In contrast with most of the measurements, NPV counts fully with the time value of money.

NPV is calculated as a total of all future cash flows discounted to their present values using appropriate discount rate, minus initial investment (CF0). Discount rate (i) is a rate of return that could investor earn on alternative investment with a similar risk (i.e. on financial markets).

Zero NPV indicates that the investor is earning exactly the discount rate. Negative NPV means that an alternative investment with the same rate of return as the discount rate would be a better investment. On the other hand positive NPV tells the investor how much he could have paid more to still achieve the requested yield (discount rate) and negative NPV tells how much less he should pay to achieve the same.

I hope you enjoyed the short article about NPV. By the way, this is where lot of Real Estate Investment Software products differentiate, lot of the low quality tools do not even mention NPV, which definitely a big mistake and can make the investor doing foolish decision on non sophisticated return calculations. Beware of these tools and make sure that they offer NPV calculation. Or simply use the free Zilculator on this website!

Note: Zilculator published a new LEARN section with an updated article including Net Present Value (NPV) excel template.