Future Value Formula

In order to assess the profitability of this investment you need to estimate the after tax cash flow of the property and estimate the expected rate of return of the investment.

One of the key figures in estimating the after tax cash flow of the property is the expected rental income over the holding period. In such a case, we will need to estimate the future value (FV) of the rent in each year over the expected holding period. We can do that by using the future value formula, which is the following for estimating the future value of the rent n years from today:


FV = R * (1 + x)ⁿ

Where

R = is the rental rate this year

X = is the annual rate of increase

n = is the number of years from today until the year for which we want to estimate the future rental value

Example Of Estimating The Future Rent

Consider for example the case of a property that is valued today at $200,000 and is expected to increase in value by 3% each year. What the value of this property will be after 5 years? We answer this question by applying again the future value formula as follows:

FV =200,000 * (1+0.03) ² =200,000 *1.159274= 231,854

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