Expected Value is a mathematical term used in probability and statistics to determine what a typical value might be. For a more detailed definition and discussion, check out wikipedia’s article.
Here’s how I use it with the Real Estate Financial Planner™ software to model my own real estate investments.
First, I model my entire real estate investing strategy by entering it in the software. See the How to Create a Real Estate Financial Plan™ post to get a good tutorial on how to enter in your own real estate investing strategy.
When I do my modeling I do include things like what properties I plan to buy, when, with what financing. I also consider if I am doing cash out refinances and when and how I plan on doing them. I consider whether I am re-leveraging up with cash out refinances or selling off properties to buy more. Or, am I paying off properties early and how I plan to do that (with cash flow as I earn it or in lump sums when I have enough to pay it off in full).
After I am finished modeling my entire strategy, then I go back and input a range of what I think could happen with things like appreciation rates (for each property), rent appreciation rates, maintenance, interest rates, vacancy rates, my income, my savings rate, etc.
Once I have established what can happen and the range of values for what can happen, I run
Once I have all those, every
I then “tweak my strategy” and rerun it to compare on strategy to another to see which I prefer from a risk and return and business I’d actually consider operating perspective.
Crushing Your Real Estate Goals Using EV
In this special class, Brian talks about using EV when crushing your real estate investing goals.
Why It’s Risky to Leverage When Investing in Real Estate
In this special video James explains—using Expected Value—why it is risky to leverage up when investing in real estate.