A dollar today is worth more than a dollar next year. Every real estate return calculation rests on that idea and on the math that expresses it.
Present and future value
Future value grows an amount at a rate over time; present value discounts a future amount back to today. The rate is the investor’s required return.
Annuities
Level payments — rents, loan payments — have present values that spreadsheet functions compute instantly (PV, PMT, NPER, RATE).
Compounding
Annual, monthly and continuous compounding change results. Mortgage math uses monthly periods; be consistent.
Common mistake
Mixing annual rates with monthly periods. Divide the annual rate by twelve and multiply the years by twelve.
Key Takeaways
- Future value grows an amount at a rate over time; present value discounts a future amount back to today.
- Level payments — rents, loan payments — have present values that spreadsheet functions compute instantly (PV, PMT, NPER, RATE).
- Annual, monthly and continuous compounding change results.
Check Your Understanding
Before moving on, explain in your own words how the ideas in “Time Value of Money” apply to a property or deal you know, and name one number or document you would need to check.
Action Step
In a spreadsheet, compute the present value of 10,000 dollars received five years from now at 8 percent, and the monthly payment on a 500,000-dollar loan at 6.5 percent over 30 years.
This course is educational and does not provide legal, tax, financial, investment or appraisal advice, and does not issue any license, certification or credential. Real estate law, tax rules and licensing requirements vary by state and change over time; consult a licensed attorney, CPA, appraiser or your state regulator for your situation.