There are a number of important metrics within the commercial real estate industry, many of which help brokers and investors determine whether or not a property is worth investing in, one of these key metrics is NPV or Net Present Value.
The Net Present Value is used by brokers and dinvestors to help determine “the profitability of a projected investment or project,” according to an Investopedia article on the topic. This particular metric may be one of the most important calculations in commercial real estate because it provides investors an idea of whether or not their given investment is achieving a target yield.
In essence, a NPV indicates to investors whether or not the property they intend on investing in is worth more or less than whay they’re paying. Knowing whether or not you’re paying more or less for a property is an important step and factor in any CRE investment.
To simplify a somewhat complex equation, NPV can be calculated by subtracting cost from the properties present value.
NPV = Present Value – Cost
According to Property Metrics, there are three NPV Categories that a CRE property can fall into:
- Positive NPV: A positive NPV indicates that you are paying LESS than what the property is worth.
- Negative NPV: A negative NPV indicates that you are paying MORE than what the property is worth.
- Zero NPV: A NPV that equals zero indicates that you are paying EXACTLY what the property is worth.
Knowing the NPV of a property among other metrics like IRR, Cap Rate, and NOI are essential in CRE property investments. For an in-depth analysis of your property check out our IRR Calculator, which can calculate IRRs, Cap Rates, NOIs, and 10-Year Cash Flows.