An investor who gets the entry right can forget the rest, especially when it comes to real estate. Purchased for cash flow, nothing matters more than valuation—you can’t afford to overpay for the future value of cash flows.
Thanks to a reader, Brad, I’ve a great real estate valuation spreadsheet to share. I can’t say enough about how awesome this utility is.
Discounted Cash Flow Valuation
Since real estate is all about the cash flow, there’s no better valuation methodology than a discounted cash flow analysis. In a DCF model, an investor projects the future cash flows and then discounts their value back to the present.
There are five steps to a solid discounted cash flow valuation:
Step 1. Project free cash flow for the period we can reasonably forecast.
Step 2. Determine a discount rate, or the rate at which we discount a future dollar back to a present dollar. Future dollars are worth less than current dollars.
Step 3. Discount the projected free cash flows to the present and sum the total.
Step 4. Calculate the perpetuity value and discount it to the present.
Step 5. Add the values from Steps 3 and 4. If you were to do a DCF for a company, you would then divide by the number of shares outstanding so as find a DCF value on a per-share basis.
Discounting the value of future cash flows from a real estate transaction is fairly easy. Finding the perpetuity value is a little more complex, but fairly simple, as well. The perpetuity value is found by the following equation:
(CFn x (1+ g) ) / (R – g)
CFn is Cash flow from our last forecast period; in most cases I use the fifth year.
g is the long-term growth rate of our investment
R is our discount rate, or cost of capital. In this case, I’d use the cost of mortgage debt.
DCF Spreadsheet vs. Doing it by Hand
You can see why doing a DCF analysis by hand is a pain in the rear. With Brad’s spreadsheet, all you have to do is enter important values for your investment. It’s incredibly intuitive, which makes for exceptional accuracy in valuing real estate with a DCF model. Here are the key inputs, just to show the complexity and power of the spreadsheet:
Purchase Price ($)
Annual Appreciation (%)
Down Payment ($)
Loan Interest Rate (%)
Loan Term (yrs)
Monthly PMI ($)
Additional Monthly Pmnt ($)
Closing Costs at Purchase ($)
Realtor Fees at Sale (%)
Other Selling Costs (%)
Monthly Rent ($)
Occupancy Rate (%)
Annual Rent Increase (%)
Annual Maintenance ($)
Annual Property Taxes ($)
Annual Insurance ($)
Monthly HOA ($)
Monthly Utilities ($)
Other Annual Expenses ($)
Expense Inflation (%)
Marginal Tax Rate (%)
Capital Gains Tax Rate (%)
Depreciable Value (%)
Duration of Analysis (yrs)
Opportunity Cost of Capital (%)
I’m not a real estate investor, so I use a cash flow to equity model for stocks that is WAY simpler than the spreadsheet I link at the bottom of the article. However, Brad’s real estate valuation spreadsheet is absolutely phenomenal for the purposes of finding a good value for a real estate investment.
Take a look at this spreadsheet and do an analysis for your own home, or even your own investment property if you have one. With rates at record lows, the value of future cash flows from your home should be very, very high—and that’s a good thing!
Hopefully each investment property is a beautiful piece of real estate, but most importantly, we should hope that it provides a vehicle in which we can buy a future dollar for less than it’s real cost. That’s how investors make money in any investment. It’s the name of the game.
Here’s the link for the spreadsheet. Let Brad and me know what you think in the comments. Is your current property meeting your goals? If you don’t have investment property, but own your home, is the NPV of your home worth more than what you paid? If so, you’re doing just fine!
Click here to download the valuation spreadsheet! We owe Brad a beer!