Financial calculations
If you want to buy a house, most of the time you will need to take out a loan. You then have to pay interest over the course of the loan, in combination with regular payback. But when doing the math on this, inflation is a factor to take into account as well: if you had a loan of, say, $100,000, and you only paid interest, in 20 years your debt would still be $100,000 nominally, but the worth of it would be much less.
The same is true when making an investment. If you have $100,000 and you plan to invest it by acquiring a property, multiple financial elements will be part of the equation:
- The initial investment (of acquiring the property)
- Future incoming cash flows (tenants paying rent)
- Future outgoing cash flows (maintenance, taxes, and other expenses)
- The residual value (the worth of the property at the end of your period of investigation)
The question is, given these four elements and expectations about future devaluation...