As an upside…there is less traffic in the streets, maybe because the students are out for their vacations. For at least two months most of you will also be able to enjoy quicktrips to meetings and offices within the metro.
Despite the summer, there's no break on the good deals that are coming in for condo investors. There are even more, as developers up the ante with their construction while taking advantage of relatively fewer rains.
In this week’s post, we continue with our series tackling the financial aspect of condo investments.
This post is aimed at aspiring investors or those who already have a small portfolio of investments. Of course some of you would already have an idea, or even your own method of choosing the most profitable among your investments opportunities. If you do, you can use the method outlined in this post as a comparison against that.
This method uses fundamental principles of investments and can be applicable not only to condo investments, but also with other investments that are entered into for cash flow/income or increase in value for eventual resale (capital appreciation).
And the method is…
We call this method the Net Present Value method. It involves measuring the net cash flow of an investment over the investment time frame you require and discounting those cash flows to the present.
Let me briefly explain the two concepts of net cash flow and discounting to you:
1. Net Cash Flow – is just the difference between the income generated by the condo and the expenses related to it. Only expenses directly attributable to the condo shall be used for this computation. Examples of expenses included are electricity, water, property taxes and association dues. An estimate for the repairs and maintenance of the condo should also be included in the computation. Alternatively, it also means the difference between the buying price of particular property and its selling price.
2. Discounting – think of discounting as computing an “investment in reverse”. In typical investments, you project from the present to the future (i.e. “if I invest P2 Million now, and it will earn 9% per year, how much will I make after 5 years?”), while when discounting, you look at the future and ask yourself how that future relates to the present (i.e. “if I want P5 Million at the end of 5 years, and an investment opportunity is earning 9% per year, how much should I invest today to get that amount?”)
Why You Need to Discount
Discounting is needed so you could compare investment opportunities even if the timing of their cash flows (meaning the time you will receive your income in cash) is different. For example, it can be used to know if it’s more profitable to sell a property now, or to hold on to the property, rent it out, and sell it after a couple of years.
If you don’t have a tool to help you do this, you can be shortchanging yourself of potentially profitable deals, simply because you only measured the absolute amount of cash you can get from the deal.
Download this Tool to Identify more Profit Opportunities
To help you identify deals where you could make more money, we have again created a simple tool for you that use the Net Present Value method. This tool is based on excel, and have worksheets that would guide you in making your own projections.
It is intended to be a demonstration tool that can be used for investments with an investment timeline of 5 years (meaning you intend to exit and sell your condo property within five years). For other time frames, you can freely customize this sheet, or you could send me an e-mail regarding your particular needs and we’ll customize a simple one for you. For more complex investment computations, I could refer you to a software developer that would be willing to work with you regarding your specific requirements.
|Download this Tool to Identify more Profit Opportunities|
|File Size:||24 kb|
A little bit of math (through the downloadable tool) can really make help you make better decisions faster and with a logical basis. Just a little bit of effort in sitting down and really doing the computations can make a huge difference to your bottom line in the long run.
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