The Price-Terms Tradeoff
The Price-Terms Tradeoff
It is widely accepted that commodities have two prices: a cash price and a different price if payment is deferred to some later time. Delayed payment for a real estate investment acquisition can involve many individual terms, such as loan-to-value ratio (LTV), interest rate, and term. Woven into this are assumptions the investor must make about the future, such as growth rate and discount rate. This Demonstration shows the most common variables and produces a net present value for each set. The third column provides an increment of positive change in that variable. The last output (right column) in the grid is the net present value (NPV) of the change in that variable after an up increment. Thus, the user desiring to know how much price difference a particular relaxation of terms may be worth can make that change and see the net present value difference, all else remaining constant. In the lower-right cell the change from the last NPV is shown.
The interplay of all the variables can, under the right set of conditions, have a canceling effect. The increase in one variable can be offset by a decrease (or increase) in another variable, which is the point of the price-terms tradeoff. Having in mind a value for each change can improve decision making.