What does the present value (PV) represent for an investor in real estate?

The present value (PV) represents the price an investor should be prepared to pay for an asset because it reflects the current worth of future cash flows anticipated from that investment, discounted back to their present value. This calculation takes into account the time value of money, which recognizes that a dollar received in the future is worth less than a dollar today due to the potential earning capacity of capital.

By determining the PV, investors can assess what an investment's future returns are worth in today's terms and make informed decisions on whether the asset is valued appropriately in the current market. Essentially, if the calculated present value of expected future cash flows exceeds the current market price of the asset, it indicates a potential investment opportunity.

The market price of the asset is not the same as present value, as it may fluctuate due to supply and demand dynamics that are not accounted for in the PV calculation. Similarly, while the future cash flows are integral to calculating PV, they are not the same as what PV represents. The total cost of acquiring the investment includes various transaction costs and fees, not just the intrinsic value calculated through present value techniques.