Property Valuation Math – Using NPV and MIRR to Identify Good Deals

By Gerald Tay (guest contributor)

For today’s post, we’ll cover two other important aspects of the Time Value of Money (TVM): 1. Net Present Value (NPV) and 2. Modified Internal Rate of Return (MIRR).

Here’s a question: A property is priced at $1.4 million and is expected to generate a yearly net cash flow of $41,200. Assuming no leverage, would an investor with a Desired Rate of Return of 8% be wise to invest at the current price and sell @ $1.4 million (for simplicity) 5 years later with selling costs of 1% of the sales price?

Answer:

$1.4M is overpriced since return does not meet Desired Rate of Return of 8%.

The Net Present Value (NPV) is -$292,212 and therefore not a wise investment.

Even though the Net Rental Yield is 2.9%, it is a wealth decreasing investment hence I should not invest in such …