Present Value of $500/mo x 30 years?

Question

Not sure this is the right section but would appreciate your thoughts.

For reasons immaterial to this question, another investor agreed to pay be $500 per month every month for 30 years. He will keep his word but, if I’m willing, would like to buy me out of this agreement.

How would you calculate the present value of buying out of the agreement?

Allan C. · Answer

@Matt D. You’ll have to agree on a discount rate to determine your net present value.  The discount rate is a % that represents opportunity cost of the capital, interest rate or whatever yield factor you agree upon.  This will often range between 3 - 10%. Once you determine the discount rate you simply discount the future cash flow (ie $100 next year at 10% discount is worth $90 in today’s present value).

Bill B. · Answer

Mr. Google found these guys..

https://financial-calculators....

And they say $93,000 at 5%. Guesstimate

$135k at 2% lowest reasonable guess, and $68k at todays 8%

So around $90k?

Chad U. · Answer

There are tons of apps you can use to calculate this.  This one is free, called "Financial Calculator".

Matt D. · Answer

Thanks all!

Bob E. · Answer

@Matt D.  Things people need to know to value your note.  What is the collateral?  Is it just a personal guarantee or secured by a mortgage?

If it is a personal guarantee then it's going to be hard to sell but a buyer would want a credit report.  Even with good credit I would guess that a buyer of a secured not would be looking for %15 or more return.  I use a 10bii app on my phone.  Putting in $500 a month for 30 years at 15% i get a value of $39,543.07.

If this is backed by a mortgage or other collateral then a note buyer is going to want to see a max 65% LTV so if the loan 90k and the collateral is worth 90k expect to see a max bid of 58.5k  based on collateral.  HOWEVER a private note buyer is going to want to see a return on their investment so if they ar looking to get 12% then your bid is going to be closer to 48-49k.

What would be needed for a more detailed answer would be details on:,

The borrower: credit history, income, etc

The note: rate, duration, down payment

The collateral: value, location (marketability) etc

Jonathan R McLaughlin · Answer

"risk free rate" is usually the T bill or 10 treasury rate, you add risk for anything above that. FHLB 5 or 10 year notes plus typical bank spread (1.75--2.50) would be a good proxy for cost of capital if you aren't an institutional player. In other words, it would cost you that much to borrow the capital to invest. Right now that seems to be around 5.5%-6%

Chris Seveney · Answer

@Matt D.

As others mentioned you are missing one key figure which is the discount rate.  That will determine the present value.

Matt Bishop · Answer

That's how I would do it.  Or use the Microsoft excel, loan amortization template.  It's a great tool for evaluating real estate deals and loan options.

Matt Bishop · Answer

@Matt D., i would use a Texas Instruments BA-35 Business Calculator which has all of these functions built in for you to amortize a loan and determine PV and FV.  I think they are at Walmart for under $50.

Ruben A Ventocilla · Answer

Assuming 6% interest, the total interest over 30 years would be around 309K with total contributions totaling 180K

Present Value of $500/mo x 30 years?

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