For any real estate investor, discounted cash flow is the gold mine waiting to be unearthed. But in order to find that goldmine, one must first know what a discounted cash flow is. Simply stated, it is the difference between what the buyer of the property pays for the house and what the seller of the house pays the mortgage holder for the house. In the mortgage industry, this number is referred to as the amortized mortgage cost or ACV. Any time the ACV is higher than the mortgage payment made on the property, the investor will receive some profit. And if the ACV is lower than the mortgage payment, then there are some buyers that will pay nothing for the property.
The discounted cash flow calculation is simple. First, the seller of the property will offer a sales price for the property. Then, the mortgage company will make a cash payment for the outstanding balance on the loan. Once the mortgage holder receives their payment for the loan, the value of the property will decrease.
Discounted Cash Flow Valuation Excel
Although discounted cash flow valuation may seem complicated to someone who has no experience in the mortgage industry, it is not. You do not have to be a math whiz to understand it. What you need to know is how to use the information that is provided in the reports provided to determine the amount of profit that you can expect on your investment. As you continue to learn about the mortgage industry and about discounted cash flow, you will understand that there are many reasons why a person would purchase a home.
There are people who are looking forward to making a purchase of a home because of their long term plans. They have an idea of the amount of money that they want to spend each month towards their retirement. If you are among these people, you also have a definite idea about the amount of money that you are going to make after putting the mortgage down. As long as you make an informed decision, it should not be hard to find a house that will fit into your budget. The problem comes when you purchase a home that is beyond your means.
Download Discounted Cash Flow Valuation Excel Template
When a person purchases a house that is more than what they can afford, they will usually suffer financially because of it. This is the reason why they are purchasing the mortgage at a discounted rate. The value of the mortgage that is left on the property is what they will get to sell it for after the time frame for the purchase expires. Most people only invest in houses that are priced in the mid to high 500s. In this case, you are almost assured that you will make a profit on the investment that you made.
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- Cash Flow Projection Example
- Cash Flow Planner
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- Annual Cash Flow Calculator
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- Simple Cash Flow Statement for Small Business
- Cash Flow Spreadsheets Template
Discounted cash flow valuation will help you see the value in purchasing a house that you cannot afford. It is important that you understand that there are risks associated with purchasing a home in a price that is too high. You do not want to have any regrets down the road about the things that you have done. The only way that you can make sure that you are making a good investment is to make an educated decision. Get your education regarding cash flow valuation and start making some money!