Monte Carlo simulation of a portfolio of real estate investments

Real estate investors are primarily interested in the risk profile (probability distribution of expected return) of their portfolio of projects. What we need, therefore, is a method to conduct a Monte Carlo simulation for a portfolio of projects with different starting dates, different lifetimes and different risk profiles.

Any project, j, of a portfolio of N projects has a past (indicated by subscript P) and a future (indicated by subscript F).

The NPV is the sum of the NPV over the past and the NPV over the future:

The NPVpj over the past - at the present time, in money units of the present time - of project j is:

where:

cost of capital over the past lifetime of project j; past lifetime of project j;

investment made at the start of project j, in money units of that point in time;

rest value of project j, at the end of its lifetime, in money units at the start of the project; selling price of premises at the end of LFj is VPj(1 + r)Lpj+LF; yearly net exploitation result of project j over the past lifetime Lpj, in money units at the start of the project.

The sum of the geometric series 1- xn n-1

Real Estate Investment Secrets

Real Estate Investment Secrets

Discover the Jealously Guarded Insights of Real Estate Tycoons and Hot Dealers! Back in the days of the wild, Wild West, when easterners traveled across this vast country looking for opportunity in the newly opened territories, they were often referred to as a ‘tenderfoot’.

Get My Free Ebook


Post a comment