Skip to main content

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.

Comments

Post a Comment

Popular posts from this blog

Common Mistakes Of New Real Estate Investors

Many people are convinced about the soundness of real estate investment as a wealth-building vehicle but most are not clear as to the path to follow and the pitfalls to avoid. More recently, I have had reason to clarify to aspiring real estate investors that real estate investment is not a get-rich-quick system. It is a system that requires knowledge, dedication and focus. We shall examine a few mistakes to avoid if you desire to effectively utilise this wealth building vehicle. One of the basic errors new real estate investors make is to buy properties blindly on the assumption that all real estate investments automatically go up. This common assumption is not true in its entirety. For instance, if you decide to buy a property in an odd part of town without considering basic infrastructures or basic advantages, and then you go ahead and develop the property, you may experience a high vacancy ratio (this means, it takes an unduly long time to rent the property to tenants) or it m...
Post a Comment
Read more

UPDC’s REIT Floats N30 billion Offering

UPDC Real Estate Investment Trust (REIT) has completed arrangements to raise N30 billion by way of offering of 3,000,000,000 units of N10 each at par. The REIT, is sponsored by UACN Property Development Company Plc. The floating of the offer, which is to commence on February 19 20123 was preceded by a completion board meeting held in Lagos on Tuesday, where the bank and all the financial advisers to the offer signed the necessary documents. The Chairman UPDC Plc, Larry Ephraim Ettah  said the offer which closes on March 28, 2013 is payable in full on application. He explained that the REIT is a closed ended one, adding that the units of the REIT  would be traded only through a licensed stockbroker once the offer is concluded. Ettah, while fielding questions from journalists explained that the company has huge projects waiting for execution, adding that the proceeds from the offer would be channeled on the projects. According to him, the REIT will invest primarily in a ...
Post a Comment
Read more

Nigerian anti-gay law prompts arrests, international condemnation

A draconian anti-gay law passed by the Nigerian parliament last year and quietly signed by President Goodluck Jonathan this month has led to the arrest of scores of homosexuals and set off an international wave of condemnation. The Same Sex Marriage Prohibition Act criminalizes gay marriage and civil unions, imposing punishment of up to 14 years in prison for gay couples who openly display their relationship in a country where, according to polls, 98% of society shuns homosexuality as deviant behavior. "This is a law that is in line with the people's cultural and religious inclination," Jonathan's spokesman, Reuben Abati, was quoted by the Associated Press as saying. "It is a law that is a reflection of the beliefs and orientation of Nigerian people.... Nigerians are pleased with it."
Post a Comment
Read more