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The Importance of Time Value of Money in Real Estate Investing

The Time Value of Money (TVM) is an important factor when analyzing commercial real estate opportunities for investment. The TVM is the idea that money in hand is worth more than money given or earned in the future. For example, if someone were given the option between N5M today or N5.2M a year from now, one would most likely ask for the N5M. Why? Because if they were to take the N5M and pick an investment with a modest five percent annual return, they would have N5.25M a year from now.
Time Value of Money
While the TVM is a basic factor when analyzing real estate, it is the building block on which an investor can measure project and investment profitability. Many real estate investments are viewed as mid-term to long-term investments, and the TVM becomes increasingly important in these situations as an investor tries to gauge whether an investment’s future earning potential justifies the risk of its initial cash outlay.

Since the cash flows earned from an investment in future years are worth less than cash at the present, these cash flows must be ‘discounted’ at the minimum return rate a real estate investor is willing to take when looking at an investment or competing investments. This rate, called the Discount Rate, helps an investor measure an investment’s Net Present Value (NPV).

If the present value of these future cash flows (the NPV) exceeds the present value of the initial cash outlay, this means that the investment’s return will exceed the investor’s minimum acceptable return rate (oftentimes called the investor’s ‘hurdle rate’) and that the investment is acceptable.

These financial concepts are crucial when measuring risk in real estate investing. Knowing how these concepts work helps to mitigate one’s risk and make an informed and educated decision on where to deploy capital most efficiently.


Rullion Associates manages a wide variety of property investments throughout Lagos, including residential and commercial buildings and accounting for the revenues that accrues from them. For more information please contact egedik@rullionassociates.com.ng or 08033615098.

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