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Vanilla551
Vanilla551
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Let's say I own a parking space. I have two options:

  • I can rent out this parking space for $1,000/month. I am assuming that the rent will keep pace with inflation, which we'll call 2% over the long term, but otherwise remain fixed in real terms. I am also assuming for now that it's always occupied (i.e. no vacancy) and that there is no tax owed on the income.

  • I can sell the space, and use the proceeds to pay down debt that I would otherwise carry throughout my lifetime. Let's say my borrowing rate on that debt is 4.5% over the long term, and again ignore tax effects (e.g. deductions).

I'm trying to figure out the breakeven price above which it makes sense for me to sell instead of rent.

I thought you solve this by calculating the present value of these ongoing cashflows. But I'm having some trouble figuring that out. For example, if I treat it like a "growing perpetuity" (given the presumed annual inflation adjustments), then that would put the sales price at:

P = $\frac{CF}{d - g}$ = $\frac{12000}{.045-.02}$ = $480,000

But that seems... wrong. So what's the right way?

(As an ancillary question: It seems that using my own discount rate here would not output the optimal selling price, but merely my own minimum bar to clear over renting. If those future cash flows are worth even more to someone else, then I should certainly sell at their higher price - i.e. if the market discount rate is lower than mine, then I should use that rate in the calculation instead of my own?)

Let's say I own a parking space. I have two options:

  • I can rent this parking space for $1,000/month. I am assuming that the rent will keep pace with inflation, which we'll call 2% over the long term, but otherwise remain fixed in real terms. I am also assuming for now that it's always occupied (i.e. no vacancy) and that there is no tax owed on the income.

  • I can sell the space, and use the proceeds to pay down debt that I would otherwise carry throughout my lifetime. Let's say my borrowing rate on that debt is 4.5% over the long term, and again ignore tax effects (e.g. deductions).

I'm trying to figure out the breakeven price above which it makes sense for me to sell instead of rent.

I thought you solve this by calculating the present value of these ongoing cashflows. But I'm having some trouble figuring that out. For example, if I treat it like a "growing perpetuity" (given the presumed annual inflation adjustments), then that would put the sales price at:

P = $\frac{CF}{d - g}$ = $\frac{12000}{.045-.02}$ = $480,000

But that seems... wrong. So what's the right way?

(As an ancillary question: It seems that using my own discount rate here would not output the optimal selling price, but merely my own minimum bar to clear over renting. If those future cash flows are worth even more to someone else, then I should certainly sell at their higher price - i.e. if the market discount rate is lower than mine, then I should use that rate in the calculation instead of my own?)

Let's say I own a parking space. I have two options:

  • I can rent out this parking space for $1,000/month. I am assuming that the rent will keep pace with inflation, which we'll call 2% over the long term, but otherwise remain fixed in real terms. I am also assuming for now that it's always occupied (i.e. no vacancy) and that there is no tax owed on the income.

  • I can sell the space, and use the proceeds to pay down debt that I would otherwise carry throughout my lifetime. Let's say my borrowing rate on that debt is 4.5% over the long term, and again ignore tax effects (e.g. deductions).

I'm trying to figure out the breakeven price above which it makes sense for me to sell instead of rent.

I thought you solve this by calculating the present value of these ongoing cashflows. But I'm having some trouble figuring that out. For example, if I treat it like a "growing perpetuity" (given the presumed annual inflation adjustments), then that would put the sales price at:

P = $\frac{CF}{d - g}$ = $\frac{12000}{.045-.02}$ = $480,000

But that seems... wrong. So what's the right way?

(As an ancillary question: It seems that using my own discount rate here would not output the optimal selling price, but merely my own minimum bar to clear over renting. If those future cash flows are worth even more to someone else, then I should certainly sell at their higher price - i.e. if the market discount rate is lower than mine, then I should use that rate in the calculation instead of my own?)

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Vanilla551
Vanilla551
  • 1
  • 2

How do I determine the ideal selling price for a cash flow that rises with inflation?

Let's say I own a parking space. I have two options:

  • I can rent this parking space for $1,000/month. I am assuming that the rent will keep pace with inflation, which we'll call 2% over the long term, but otherwise remain fixed in real terms. I am also assuming for now that it's always occupied (i.e. no vacancy) and that there is no tax owed on the income.

  • I can sell the space, and use the proceeds to pay down debt that I would otherwise carry throughout my lifetime. Let's say my borrowing rate on that debt is 4.5% over the long term, and again ignore tax effects (e.g. deductions).

I'm trying to figure out the breakeven price above which it makes sense for me to sell instead of rent.

I thought you solve this by calculating the present value of these ongoing cashflows. But I'm having some trouble figuring that out. For example, if I treat it like a "growing perpetuity" (given the presumed annual inflation adjustments), then that would put the sales price at:

P = $\frac{CF}{d - g}$ = $\frac{12000}{.045-.02}$ = $480,000

But that seems... wrong. So what's the right way?

(As an ancillary question: It seems that using my own discount rate here would not output the optimal selling price, but merely my own minimum bar to clear over renting. If those future cash flows are worth even more to someone else, then I should certainly sell at their higher price - i.e. if the market discount rate is lower than mine, then I should use that rate in the calculation instead of my own?)