Net Present Value (NPV)

Net present value is the present value of an investment's future cash flows minus its cost. A positive NPV means the deal beats the investor's required return. For a property, the future cash flows are each year's NOI or cash flow plus the proceeds from an eventual sale.

Buy the default house for $500,000 cash, collect a flat $28,892 of NOI for five years and sell at a 6.5% cap rate for about $444,500. At an 8% required return, the NPV is about negative $82,000. Even a resale at the full $500,000 leaves it around negative $44,000.

A negative result does not mean the deal loses money. It means it earns less than the 8% target. Rent growth, a lower exit cap rate or better financing are the usual levers that turn NPV positive, and each depends on NOI.