Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/102789
million. When the sale proceeds are combined with a $50,000 cash fow in year four, the property generates a $1.8 million cash fow in year four. Te investor fnds an alternative investment of similar quality and risk yielding 7 percent, creating the discount rate for the NPV calculation. In this simple example, the NPV is $1,465,861. Tat's the intrinsic value of this property assuming the investor successfully executed the value creation strategy. So, an investor can buy this property for $1 million knowing it has intrinsic value of $1,465,861. Key NPV Factors Because NPV involves future cash fow, it is critical to forecast accurate assumptions when modeling a property investment. Here are a few key factors when determining NPV. Investment strategy. Modeling a stabilized property versus a high-vacancy property requires diferent forecasting assumptions. Use worst-case scenarios to offset potential forecasting and assumptions errors, especially on properties without a consistent operating history. Discount rate. Te discount rate should refect market conditions. An increase in the discount rate in the example from 7 percent to 13 percent would reduce the NPV to $1,185,000. Income and expenses. Forecasted income and expenses should be reasonable and supported by factual data. Forecast lease-up absorption on vacant properties using market standards. Also, use industry standard expense benchmarks in model assumptions. Future sales price. Use a capitalization rate appropriate to the asset's location, class, and product type that conforms to trending market conditions. Forecasts for capital markets, the local economy, and real estate fundamentals should refect a safe cap rate when modeling future sales prices. Make sure the assumptions in your modeling are founded on sound and reasonable data when determining the intrinsic value of a real estate investment. Understanding the investment strategy, proper discount rate, accurate income and expenses, and future sales price will improve the accuracy of the intrinsic value end result. For protection, value-oriented investors insist upon a margin of safety by buying low in case the intrinsic value calculation was too optimistic. Integrating replacement cost and NPV methods into your fnancial analysis and modeling will help uncover more valueoriented real estate investment opportunities. As the general real estate market improves in the coming years, such opportunities will be harder to pencil out, so take advantage of today's opportunities using intrinsic valuations as your measurement stick. Craig Haskell is the author of The Inside Game to Real Estate Value Investing and founder of Value Hound Academy, an online membership community for value-oriented real estate investors. Contact him at craig@valuehound academy.com. Log on for the latest CCIM member beneļ¬t National Virtual Deal Making Session CCIM Designees present property listings to CCIM members and prospective buyers in a free webinar. Last year, designees presented a total of $359 million in properties, at an average of $4.8 million per deal. Don't let this exclusive opportunity pass you by. Register for the Feb. 5th session for free today. Visit ccimdealmaking.com for more information. CCIM.com January | February | 2013 17