Time Value – How to Understand the Concept and Its Importance to Real Estate Investors

An analysis of real estate investment requires understanding the time value of money. Mainly because real estate investors realize that now has $ 100 because inflation will consume the power of purchasing over time, so it is more desirable to get the same amount of money in a year or more.

Meaning of Time Value

Imagine that you have just won a $ 1 million lottery and will pay the same $ 50,000 payment over the next 20 years. If each future payment is reduced by 8% per year, the present value of your twentieth payment is only $ 11,586; the sum of all bonuses after 20 years is worth about $ 530,180

So as time goes by, The value of the money collected – over time, the power to buy items less and less.

So we have to consider the basic concepts and definitions of monetary time value

present value cash flow or the value of the series (today) cash flow will be in the future designated time Or time available. For example, our lottery bonus is worth $ 1 million

Future Value Future value or value (tomorrow) is a cash flow or a series of cash flows worthwhile in the future designated time. In this case, we see that the sum of our lottery bonuses collected over the past two decades is the future value of $ 530,180

Compound This is to determine the future mathematical program value. For example, if the money is placed in a stakeholder account, the ratio will increase by some ratio at a particular time in the future, and the ratio will increase to a specific time.

[1945900] Discount is the mathematical process to determine the present value. In this case, we see that the final $ 50,000 payment received in 20 years is discounted at a rate of 8.0% per year and is currently worth only $ 11,586

Annuity A series of equal cash flows at equal intervals. The next two decades will be charged $ 50,000 per year for lottery tickets, for example, because of our lucky, will be an annuity.

[1945900] Annuity This constitutes a series of uniform cash flows that are paid at equal intervals

If we start at the beginning of the next year

General annuity This constitutes a series of uniform cash flows, at the end of each period at the same interval To pay. In this case, suppose we do not charge us for the first ten thousand dollars to pay for twelve months, and the rest are paid every twelve months. Then our bonuses will reach this category.

Why is this annuity difference important? Because in the previous category, we will have $ 50,000 immediately and will receive our final payment within 19 years; then we will not receive our final payment after 20 years. Obviously, the sooner we collect the money, the higher the time value of the currency, so the annuity will benefit us

You get this idea

Investment must always study the time value of real estate. Real Estate Investors It is concerned that the timing of the cash flow collected from the investment is more important than the amount received from the monetary time value