All Forum Posts by: Daniel Miller

Dion, is there anyways I can attach my spreadsheet that I created and you can look at it? If not I will run through the example. It is going to be a long post. I dont mind doing it though. Please let me know.

Dan

J Scott,

Let me rephrase this sentence. I need to proofread these posts more carefully.

If my analysis shows that the NPV from a sale in year 3 is $25,000, and the NPV from a sale in year 5 is $27,000 than it is more than likely a better financial decision to dispose of the asset in year 3 and realize the equity you have made in the investment, as oppose to waiting two more years to sell it and only adding $2,000 more to the bottom line. So, the NPV does rise, but it does not rise enough between years 3 and 5 that it makes fiscal sense to keep the investment beyond year 3.

The properties I run through my analysis are ones that are specifically chosen to have a higher than average probability of rising rents. I do not analyze properties in the ghetto or shady parts of town and I do not analyze any properties that are in tip-top condition. There has to be a certain value-add potential to any property that I anticipate making an offer on. I search in parts of my farm area that will, more than likely, rise in rents and/or have undervalued rents to begin with. I should have explained my analysis parameters.

As far as my use of the word plateau, that was incorrect. It never does plateau. The NPV always rises due to the appreciated rents compensating for more than the increase in operating expenses. If I anticipate being able to raise rents (and/or the market calls for increased rents) I will set the appreciation of rents at a higher level. In this sense, if I purchase a property with a small NPV, but the appreciated rents anticipate (for example are 3% annually) this is typically a better property to hold and sell in years 7 or 10. The NPV will increase exponentially over the holding period.

Conversely, if I purchase a property (like my previous example) with a year 3 sale attaining a $25,000 NPV and year 5 sale a $27,000 NPV, it does not necessarily plateau but the equity has been "realized" in this investment and the IRR decreases every hypothetical sale year after year 3. The NPV does rise, but it does not increase enough that it makes fiscal sense to keep the equity already earned in this investment.

BTW, 99% of the properties I look at are MF.

It is fun to get creative with this stuff. These are all just tools to help me compare different MF investments. No calculation will be without flaw. If anyone has any advice on what they would do differently please let me know. I am always tinkering with my analysis.

Thanks

Hello All!

I am a MF investor. I like using NPV in the calculations for my APOD analysis. I am going to run through how I conduct my analysis. Please criticize if anyone sees anything that could be modified. I have a couple college degrees, but not in finance.

My discount rate is 10%. I want to compare all the investments to the same discount rate. I use this across the board.

I take the Adjusted Sales Price (what I think I can purchase the property for) and the current rent rolls.

I then appreciate the rents annually between 1% and 3%. It depends what part of town the subject property is and how much below/above the current rent roll is at the subject property.

The expected sales price (if sold in years 3,5,7, and 10 of ownership) is then adjusted by the appreciation of the rents.

I appreciate the expenses by 2.5% at a Year 3 sale, 5% at a year 5 sale, 7.5% at a year 7 sale and 10% at a year 10 sale.

I use the year 3,5,7 and 10 sales price (deduced from the appreciation of rents and the appreciation in operating expenses) to determine my NPV for each hypothetical year's sale.

I also factor in closing costs, commissions, etc...

This is not the only factor I use in determining whether or not to make a bid on a property. It does help me though. I believe its most useful determination is the equity realized upon the purchase of the property.

If the NPV, for example, is $25,000 on a year 3 sale and $27,000 on a year 5 sale, conversely the IRR will typically be higher in year 3 than years 5,7, and 10. The property should not be held longer than 3 years. The equity I have built within the first 3 years does not grow exponentially. It plateaus. My equity growth within the subject property becomes stagnant and my money should be allocated to another investment.

Thoughts?