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Real Estate Finance Basics

Real Estate Finance Basics. Dr. Arthur C. Nelson, FAICP January 2009. Not Rocket Science. Future Value Present Value Future Value of an Annuity Future value of cash flow stream Present Value of an Annuity Present value of cash flow stream Mortgage Constant Loan Amortization.

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Real Estate Finance Basics

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  1. Real Estate Finance Basics Dr. Arthur C. Nelson, FAICP January 2009

  2. Not Rocket Science • Future Value • Present Value • Future Value of an Annuity • Future value of cash flow stream • Present Value of an Annuity • Present value of cash flow stream • Mortgage Constant • Loan Amortization

  3. Future & Present Value • i = annual interest rate • n = number of years • FVi,n = PV(1+i)n $1,000,000 today @ 2% interest, 10 years = • PVi,n = FV / (1+i)n $1,000,000 in 10 years @ 2%discount =

  4. Trust Fund Proceeds • $100,000 received at end of each year for being “good.” How much is it worth after 20 years @ 5% interest? • “Future Value of Regular Annuity” • FVAi,n = ANN x {[ (1+i)n – 1] / i} =

  5. Lottery Winnings • You win $1,000,000 annually for 20 years, what is the present worth @ 5% discount rate? • Present Value of Annuity • PVAi,n = ANN x {1- [1 / (1+i)n ] / I } =

  6. The Hairy Monster • $1,000,000 mortgage (first house after graduate school). What are the monthly payments @ 6% interest (jumbo loan) 30 years? • Mortgage Constant, Monthly • MCi,n = PV x { i/12 / 1- [(1/1 + i/12)n x 12]}

  7. Loan Amortization Schedule Vinnie lends you $1,000,000 @ 12%, 5 years. What are your annual payments? EOY Amount Annual Year Outstanding DS Interest Principal 0 $1,000,000 1 $ 842,590 $277,410 $120,000 $157,410 2 $ 666,291 $277,410 $101,111 $176,299 3 $ 468,837 $277,410 $ 79,955 $197,455 4 $ 247,687 $277,410 $ 56,260 $221,149 5 $ 0 $277,410 $ 29,722 $247,687

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