Calculating Net Present Value (NPV) in an investment is a formula that is used by all financial lenders and institutions. A Net Present Value calculator is most commonly used during the purchase, refinance or modification of a primary residence or rental property.
In the most recent years during the real estate financial crisis, every property must pass the NPV test in order to qualify for loans or modifications. The United States Treasury has set the parameters for all lenders and currently there can be up to 33 variables in calculating NPV for a specific investment.
Using a Net Present Value Calculator
This formula is too complicated for simple math, therefore; the use of an excel template along with a Net Present Value calculator is absolutely necessary to determine an investments’ NPV. In the case of a loan modification, the NPV must be positive or have an output of positive value over the life of the terms that benefits both the lender and the borrower.
In most cases, an investment NPV will look at the current value of the property, the current income potential of the borrower and their ability to repay the loan over the term. If the NPV determination is negative, this investment is not a wise choice for either party. At that point the investment will not qualify for any type of lending product, this can present quite a problem for borrowers whose only options are loan modifications to keep their property.
The other vital thing to remember about NPV is that is can change over time. Therefore a property or investment that did not have a positive NPV during the original calculation may change over a period of 6 months or more. This can be beneficial if your current investment is underwater or upside down and by keeping track through an excel template it will allow for certain parameters to be updated to show a positive NPV at a later date, thus qualifying for more investment options.