Financial Considerations in Real Estate Investment
In a real estate investment, there are some financial considerations one should put in place. To begin, many investors usually want to approximate their property’s possibility to produce rental income. In most cases, this is usually done by evaluating the rental history of a property similar to the one in question.
Other than that, it is also important to approximate the worth of assets. For instance, if a property breaks on rental income, you can still sell it at a better price in the future depending on how its worth on the market might change over time. Therefore, it is crucial for one to calculate the future value of his or her property.
Calculating the Future Value of a Property
What is listed below is an illustration on how to calculate the future value of your property.
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To calculate this, one will need to find out the projected growth rate of the asset in question. According to statistics, real estate has tremendously grown at a rate between 4 to 5 percent, which is dependent on the price index one looks at. In the U.S., the house price index has gone up by 3.4 percent since 1991. Using this, this price index is then converted to a decimal and becomes 0.034.
To calculate the expected future value based on growth rate, 1 is added to the rate and raised to a power equivalent to the number of years one is looking at. Then the following mathematical formula is used:
Future growth = (1 + annual rate)years
After that, multiply the future growth by the recent value of the property in question.
Future value = (future growth) x (recent value)
Example
For instance, let us assume you purchase an investment worth $100,000 and you would like to approximate its value in the next 10 years. This can be calculated as shown below.
Assume we use an average rate of 3.4 percent.
Future growth = (1 + 0.034)10 = 1.4
In order to get the future value, the below formula will be useful:
Future value = (future growth) x (recent value)
Future value = 1.4 x $100,000 = $196,000.