There is an incredible power in understanding the time value of money and using your financial calculator to make large profits.
Your first inclination will be to skip these articles because they look too much like mathematics. But I think you will find that the investor who understands the power of cash flows will be the investor who gets very rich. No matter what you do in your investment life you simply must understand the time value of money.
The Newsweek financial writer, Jane Bryant Quinn, has said the two most powerful forces in the world are gravity and the time value of money, yet few investors understand that power. I feel a financial calculator should be the best tool anyone with even a modicum of interest in real estate can own. The books that come with them make most functions easy to understand. Mortgage tables have become obsolete.
It is through the hands-on use of a financial calculator the you can learn:
- The present value of a series of cash flows,
- Your yield on a series of payments,
- The cost to finance a house,
- The effect of early payments on home loans,
- The yield on a mortgage,
- The differences between various mortgages,
- How to buy and finance discounted mortgages,
- How to buy real estate at tremendous discounts using notes.
Not many people can answer this question:
Which is better:
- To receive $1100 in one year or
- receive $1610 in five years or
- receive $500 in 5 years and $181 per month?
Yet that is the kind of thinking that a successful investor must understand. There is no quicker way to that understanding than through an inexpensive financial calculator.
The exciting thing about these machines is that you can begin to make very good judgments about how to handle your own home mortgage. Should you double-up on your payments? Should you pay semi-weekly? Should you pay your mortgage off completely? These questions were very difficult to handle when there were only tables and books to use to look up the interest, the principal and balance on loans. With calculators you can now ask “what if?”… I change the time to amortize, or change the interest rate, or change the payments? What would be the most profitable to me?
An investor or real estate professional who understands the time value of money is far ahead of most people. It is the subject with the greatest potential for profit and the least understood by the average investor. This was understandable before the days of these calculators, but now you must, at least, be conversant with the concepts programmed into a financial calculator.
A simple calculator that figures the five basic variables in a loan is sufficient. (These variables are: Number of Payments, Interest, Present Value, Payment, and Future Value.) Calculators that figure Internal Rate of Return, various depreciation schedules, and that are programmable are generally more than most people need since you would seldom make these calculations in the field.
So one major road to success in real estate is in understanding the time value of money. We will explore these concepts in other internet articles and in our newsletter. You will be amazed at the power in your calculator.