What is the primary purpose of evaluating net present value (NPV) in real estate?

The primary purpose of evaluating net present value (NPV) in real estate is to assess if the investment meets the required rate of return. NPV is a financial metric that calculates the value of an investment by considering the present value of expected future cash flows, which includes rental income and any potential appreciation, discounted back to their present value using a specific rate of return.

This analysis helps investors determine whether the projected returns from the investment justify the risks involved and if they meet or exceed the investor's required rate of return. If the NPV is positive, it indicates that the investment is expected to generate more cash than the cost of the initial investment, making it an attractive opportunity. Assessing NPV thus plays a critical role in financial decision-making in real estate, ensuring that investments not only yield returns but also align with the investor's financial goals.