Discounted cash flow formula

1 Star2 Stars3 Stars4 Stars5 Stars (No Ratings Yet)
Loading...

Suggestions for purchasing a second home to rent – DC Fawcett

admin

At the present juncture, the interest rates are very low.  So, this is the apt time to take into account putting the investment in rental property.  If the huge portion of the monthly cost for ownership, which is of course the mortgage payment, could be frozen for 30 years while there is a gradual increase in the rent, there is an escalation in the resale value of the property.  All along, you enjoy the income and benefits with regard to the tax.  That is the best accomplishment or suggestions that you could make.

Suggestions-for-purchasing-a-second-home-to-rent

But, there are some ifs which we need to consider.  It mostly is related to the investment property itself, rather than the issues regarding finance and tax.  Those rates of interest for a 30 year fixed mortgage are presently in the 3.5 – 4.0 range.  DC Fawcett says But, it has not been that much less in the past four decades.  And of course, the tax code is in the favor of home ownership and investment.

Consider the advantages in the tax:

  • Taxes, interest, insurance and other expenditures could be deducted against the property income. Losses could be deducted against the other source of income.

  • There is another tax deduction that comes in the form of depreciation. It is actually an allowance for damages, which is usually more than 27.5 years.

  • Rental properties could be disposed and the developments could lead to purchase of another rental property without payment of capital gains taxes.

Take into account variety of properties:

  • If one arrives at a decision to put investment in a rental property, he or she could do it in a variety of way.

  • A rental unit in the present residence or on property that exists.

  • Raising an apartment in an existing multi-residence apartment house or cooperative.

  • A residence or complex in a community that you would like to retire to.

  • A residence or apartment in the vicinity where children are going for college and this is a viable alternative to student housing.

  • Having a vacation home besides a lake, beach or ski slope where it could be used in two weeks of a year without going for a compromise on tax advantages.

 

Do not miss out the fact that you will turn into a landlord

Every one of the above listed factors has its own pros and cons.  Some people do not prefer turning into a landlord.  Management of a property and the occupants needs ample time and effort.  One can do the minor repairs all by himself.  If one is going to purchase a dual family residence in a developing neighborhood, for instance, residing in one unit and putting the other to rent, one could pinpoint the own expenditure of shelter (home expenditures joined with rental income and a fine depreciation on the rental unit) making a free approach or surpassing it within a couple of years.

Do the Homework on real estate

Making a fine research through the rental property should be as arduous as purchasing a residence to live in.  You must know the specific criterion in the market, the zoning laws and the existing trends and types of the vicinity.  Look out for something like a waterside, or nearness to a college or an older house in a particular community.

While doing the necessary arithmetic, take into account the fact that tenant paying substantial money has the privilege to anticipate immediate reply to any problem be it huge or not noteworthy. Those residents who know that they are paying less will not be that much demanding.  If the aspect of managing the rentals is intimidating, your broker in real estate could refer you to a property manager or a caretaker.  Also, online search will get you specific property managers.  But, one should be aware that getting a property manager will consume a huge amount of money.

Conclusion:

Putting money into real estate might not be the right choice for everybody. But, if you have a long term investment goal, and patience for the inherent risks, the advantages are truly considerable.

Dc Fawcett, the owner of the Virtual Real Estate Investing Club, has blogs through which you can draw a fine idea regarding purchasing a second home that could be rented.  Dc Fawcett invests into various virtual markets and is a master of wholesaling, rehabbing, and cash flow investing. His blogs are valuable in the sense that he could give a fine idea in the buying scenario.

1 Star2 Stars3 Stars4 Stars5 Stars (No Ratings Yet)
Loading...

Discounted cash flow formula for real estate by DC Fawcett

admin

Though discounted cash flow formula is popular and widely used, there are lots of misconceptions about it. In this topic, DC Fawcett intends to clear some of the misunderstandings about this concept and educates the people with some of the facts.

Discounted cash flow formula for real estate

To understand the discounted cash flow concept, you need to know the basic real estate cash flow. You need to analyze some of the factors before you go for it. These factors are

  • How much amount goes for the investment?
  • When does the amount go into the investment?
  • How much amount we get in this investment and
  • When do we get that amount?Discounted cash flow formula for real estate - dc fawcett

To answer these questions, you need to do more analysis so you can arrive at the right figures. They are

  1. Holding period –

    is generally assumed as the timing of cash flows occurred at the end of the year. In commercial real estate, the holding period has a standard variation from 5 to 15 years for the financial analysis.

  2. Initial investment –

    is normally shown as nil but it includes the acquisition costs required to buy an asset, deducting the mortgage proceeds if any. It can also be called as total cash out of hand required to buy the property.

  3. Annual Cash flow –

    Is taken as annual cash flows before tax for a real estate property. In other words, it is gross profit minus all the expenses and debt service. Negative cash flow means the money is going on investment. Positive cash flow means the amount is coming out of the investment.

  4. Sale Proceeds –

    represents the cash flow received after the property disposition. It shows the last period of the holding period in real estate cash flow.

What is discounted cash flow analysis?

Discounted cash flow analysis is a technique that is used in finance and real estate to discount the future cash flows to the present. Following are the steps for real estate valuation.

  • Visualize the cash flows that occur in future.
  • Establish the total return that is required.
  • Discount the cash flows to the present at the required rate of return.

Forecasting the expected future cash flows enables you to create its projection, known as real estate proforma. It puts all the elements in place which gives you the answer to the 4 basic questions of the real estate cash flow model, mentioned above. The investors will get the information about their total return for the project. In the case of an individual investor, it is the rate of return they want. The requited return for a corporate investor is the weighted average cost of capital (WACC). Ascertaining the discounted rate has always been a discounted cash flow. It includes accounting for the risks taken for the project compared to other alternative investment opportunities.

Conclusion

DC Fawcett says that Once you forecast the cash flows and establish a discount rate, the discounted cash flow analysis for the real estate project can be used to derive the internal rate of return and net present value.