Real Estate Investments –
Calculating Future Value
When determining what a property is worth,
there are two major considerations: what it will rent for and how it will
appreciate. Determining what it will
rent for can usually be done by comparing a sampling of rents from nearby
rentals for sale in the MLS. Property
managers are also a good source for this information. Some will even offer to provide a free
analysis of the property for you. For
determining the future value of real estate, however, it’s a simple
calculation.
Let’s assume
that you do not have a crystal ball.
Real estate has historically appreciated at a rate between 3% and 5% per
year. The U.S. House Price Index shows
that residential homes have risen at a rate of 3.4% per year on average since
1991. 3.4% is a safe bet for this
purpose. 3.4% will be represented as
.034 for the purposes of our calculation.
For the
calculation, add one to the growth rate (1 + .034) and raise this to the power
equal to the number of years that you are projecting.
Future growth =
For
example
Your investor want to buy an investment
property worth $200K and wants to know what the approximate historical value
will be in 10 years. Using a 3.4%
average rate, we can calculate the future growth factor as follows:
Future
growth =
= 1.4
Multiplying
this factor by the current value of $200,000 gives us the potential future
value of the property.
Future value = 1.4
X $200,000 = $280,000
Or you can
cheat by going to this online calculator of future value CLICK HERE. Calculating future value is not an exact
science and should be used as a tool, but not the rule. Some markets are hot and appreciate at much
faster rates and some are cool and values have been known to depreciate. The longer you project out in the future, the
more accurate (based on historical average) your prediction will be.
To make your dreams come true, Call The Easterbrook Team for your refinance and purchase needs.
John Easterbrook NMLS#226555
Patty Aguon NMLS#994635
