Real Estate Assets
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Investment Real Estate Wealth
ALL ABOUT REAL ESTATE INVESTMENT STRATEGIES
The Time Value of Money
A major consideration in any investment decision is the
time value of money.
Money has a time value. Theory being that a sum of money received today has a greater value than that same sum of money to be received some time in the future. Let's assume you were offered an investment opportunity requiring a $10,000 investment with a return of $15,000.00 Sounds like a pretty good investment...looks like a 50% return on your investment. Now let's consider that your $10,000.00 investment were required today, and the $15,000.00 return would occur five years from today. The return on your original investment of $10,000.00 with $15,000.00 to be received at the end of year 5 would generate a return of 8.45%. That paints an entirely different picture exposing what appeared to be a good investment on the surface . . .to be a bummer. Continued below
The earlier a cash flow is received in the holding years of an investment the greater the percentage of return. Conversely, the later a cash flow is received in the holding years of an investment the lower the percentage of return. The Internal Rate of Return (IRR) is a refinement of the analysis process in evaluating a real estate investment. IRR is a discounted cash-flow analysis calculation used to determine the potential total return of a real estate asset over an anticipated holding period. The calculation takes into consideration the total dollars contributed in the investment, and when they are advanced, and the total dollars out of the investment, and when they are received. However, the IRR has shortcomings that fall short of addressing wealth accumulation. Since the IRR has been shown to have certain shortcomings in arriving at the ultimate goal of wealth accumulation, a further refinement alternative measure of approach, the Financial Management Rate of Return (FMRR) is utilized. Far too complicated to address in this article...but your real estate investment counselor will be adept at such calculations if he/she is a CCIM. This very general overview of sophisticated measures of calculating return on real estate investments doesn't even scratch the surface in defining them. A clear understanding of them would require post graduate level study. The point to be made here is to surround yourself with experts with the expertise to show you how and why, in making sound real estate investment decisions. Again, your primary goal as a real estate investor is to maximize your long-term wealth position while minimizing risk. In the midst of the hype of all of the technical jargon; cap rate, cash on cash return, IRR and FMRR, you, the investor, would do well to focus on your ultimate goal...maximizing your potential for wealth accumulation. About the
author: Stewart L. Mac Donald, CCIM, is President of
Real Estate Assets, Inc., a consulting services company
focused on maximizing wealth through Asset Management in
the real estate portfolio. Mr. Mac Donald has counseled on and
has been an active participant in a wide range of investment
real estate projects. He has written and presented seminars on
"Strategic Planning in the Investment Real Estate
Portfolio" before bar associations, financial planning and
investment groups. | |
