Using Finance Formulas to find the best value of houses

In summary, house two has a higher potential increase in value due to the new school being built, but also has a higher potential decrease in value due to the increase in crime rates. Ultimately, it is up to the individual to determine which factors are most important to them when making a decision on which house to purchase.
  • #1
Niaboc67
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Homework Statement


House one is going for 250.000 in the suburb and has a new power plant being built and also has a decrease in crime. House two is also 250.000 in city has an increase crime rate but has a new school being built. What house will be the best value in a 10 year span if you buy the house in full now?


Homework Equations


Formula Future Value of Compound Interest: A=p(1+i)^n


The Attempt at a Solution


House one increasing by .02 each year due to the decrease in crime: A=250.000(1+.02/1)^10 = 304.748605 - 250.000 = [54.748605] increase

House one also is decrease in value by .04 each year due to the new power plant: A=250.000(1-.04/1)^10 = 166.208159 - 250.000 = 83.791841 decrease

Altogether: 250.000+54.748605-83.791841 = 220.956764 --> value at the end of a ten year span.


House two increasing by .05 due to a new school being built: A=250.000(1+.05/1)^10 = 407.2236567 - 250.000 = [157.2236567] increase

House two also has a decrease due to crime rates on the rise: A=250.000(1-.07/1)^10 = 120.9955768 - 250.000 = [129.0044232] decrease

Altogether: 250.000+157.2236567-129.0044232 = 278.2192335

Thus house two is the best value in ten years.


Ok after that everything is fine. My questions are...How would i set up mortgage payments for each of the two houses. Also how would i set up the interest rate i will you get for each house? How much will would i own of each house (equity) in the 10 years?

Thank you
 
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  • #2
I'm confused by the question. The future value of the house may affect the price and interest rate you are willing to pay but they do not determine what interest rates will be offered.
 

What are the finance formulas used to find the best value of houses?

There are several finance formulas that can be used to determine the best value of a house, including the net present value (NPV) formula, the internal rate of return (IRR) formula, and the capitalization rate (cap rate) formula. These formulas take into account factors such as the purchase price, interest rates, expected rental income, and projected expenses to calculate the potential return on investment for a particular property.

How do I calculate the net present value (NPV) of a house?

The net present value (NPV) formula involves calculating the present value of all expected future cash flows associated with owning a house, including rental income and expenses, and then subtracting the initial cost of purchasing the property. The resulting value can then be compared to the purchase price to determine if the property is a good investment. A positive NPV indicates a profitable investment, while a negative NPV indicates a potential loss.

What is the internal rate of return (IRR) and how is it used in evaluating house values?

The internal rate of return (IRR) is the estimated annualized rate of return that an investor can expect to earn from a particular property. It takes into account the initial investment, as well as the expected future cash flows, and is used to determine if the potential return on investment is worth the risk. A higher IRR indicates a more desirable investment opportunity.

What is the capitalization rate (cap rate) and how is it used in real estate investing?

The capitalization rate (cap rate) is a formula used to estimate the potential return on investment for a particular property based on its net operating income (NOI). It is calculated by dividing the NOI by the purchase price of the property. The resulting percentage can then be compared to the cap rates of similar properties in the area to determine if the property is a good investment opportunity.

How can I use finance formulas to determine the best value of a house in a specific location?

In addition to using finance formulas to evaluate the potential return on investment for a particular property, they can also be used to compare the values of different properties in a specific location. By plugging in the relevant data for each property, such as purchase price, rental income, and expenses, you can determine which property offers the best value and potential return on investment in that specific location.

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