A regular stream of payments payable at
stated intervals for a fixed period of time,
often for the recipient’s lifetime in the
case of insurance or pension. For investment
calculations, an annuity can be viewed
either in terms of compounding (the future
value of a series of regular payments), or
discounting (the present value of a series
of future regular payments).
A mortgage is a good example of an
annuity in the real estate marketplace.
While the borrower’s perspective is one of
repaying a debt, the lender’s point of view
focuses on investing in an annuity. The
initial loan advanced by the lender becomes
an investment made today with the legal
right to receive equal payments at
predetermined intervals in the future.
The relevance of annuities and regular
stated payments is limited for real estate
practitioners as most real estate
investments generate uneven cash flows
throughout the holding period. Compounding
and discounting of irregular cash flows is
an integral aspect of real estate investment
analysis. Commercial practitioners routinely
examine, critically assess, and forecast
cash flows of investment-grade properties
for clients. Fortunately, modern financial
calculators and software programs handily
address irregular operations and sale
proceeds cash flows that lead to investment
comparisons and valuation. Cash flows are
not only determinative of value in
revenue-producing real estate, but also form
the basis for meaningful comparison of
investment options.
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