How the Time Value of Money Works with Commercial Real Estate
The time value of money is one of the basic principles of finance, which explains how people make decisions regarding investments. It is also relevant to real estate since this industry involves a lot of money. To fully understand how the time value of money works, it is essential to first look at the basics of interest and compounding. Interest is the cost of borrowing money or the rent you pay for using someone else's money. The time value of money assumes that people prefer to have their money now rather than later because they can earn interest on their money if they wait to invest it. Compounding interest is when interest earned on an investment is reinvested and begins to make its interest upon itself. Compounding interest can significantly impact returns over time, whether you are earning interest or paying it, especially when combined with compounding effects from multiple assets or liabilities. Theoretically, it is much better to earn compounding interest than to owe compounding interest. By understanding how time value works, investors can make more informed decisions about when to trade or refinance commercial real estate properties.
A Powerful Concept with Significant Impact
The time value of money is the concept that money today is worth more than money in the future. This powerful concept can have a significant impact on your financial future. How so? At its simplest, it means that money today is worth more than money in the future due to inflation - which erodes the purchasing power of each dollar over time. That's why investing, rather than spending or saving, is typically viewed as the best option for growing your wealth over a long period. Understanding and utilizing the power of this concept helps ensure that your hard-earned dollars continue to be worth more in the distant future as money earns interest, so it's worth more over time.
Having money is great, but having money that's invested and earning interest is an even better situation. The interest earned on these investments must be higher than the inflation rate to be worth it; otherwise, the value of the money decreases over time. With interest rates that meet or exceed the inflation rate, your money will be worth more in the future than it was initially. This puts you in a stronger position to set yourself up for success and financial freedom. The time value of money is vital to understand when considering commercial real estate investments.
When it comes to commercial real estate investments, the time value of money is one of the most important things to master and consider. After all, understanding this concept can help you estimate growth better and make better decisions when comparing potential investments. With knowledge of this powerful tool, you get a better sense of what earnings or losses you may be looking at over a given time frame. Such information can provide the confidence you need to make informed decisions on the type and size of commercial real estate investment that best suits your portfolio and financial goals.
The Long Game of Commercial Real Estate Investing
Commercial real estate typically takes longer to generate a return on investment than other investments, such as stocks or bonds. Investing in commercial real estate is often a longer-term commitment to generate returns than you might experience with stocks or bonds. Although the investment cycle is more prolonged and less liquid – there is less volatility than stocks, and quarterly distributions within this type of investing are typically what ordinary investors can look forward to anticipating. As tempting as it may be to try to find quick wins through stocks and bonds, commercial real estate serves an essential purpose for those who take the longer-term approach when investing – highlighting the value of slow and steady success over more extended periods. The potential return on investment for commercial real estate is higher than other types of investments, which makes it an attractive option for many investors.
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