In this article, I want to acquaint you with the concept of time value of money and show you why it is important when real estate investing.Time value of money is the concept of measuring the value of money over time because it is essentially a fact that money does not remain static and over time does change value.
The money in your checking account, for example, is more likely to buy you more goods and services today than it will next year due to inflation alone. In other words, you should not expect to enjoy the same purchasing power next year as you would today because over time the value of your money will likely decrease.
Understanding time value of money, therefore, is crucial to real estate investing.
This is why real estate investors try so desperately to measure and solve for those changes with such elements as internal rate of return and net present value. Because money is not static, and likely will change in value over time, a prudent real estate investor will always measure cash flows and rates of return with consideration for time value money.