The Time Value of Money vs. Real Estate Today and Interest Rates Tomorrow

MonicaHeader The other day a client of mine from my business school called me up, and we reminisced about the days we spent together grueling over our finance classes.  He said to me that what we studied was so theoretical, and he rarely ever uses some of the finance theories we grappled with during our three years in school.  I immediately interjected and said that I actually use it on a daily basis.  One particular theory I apply and ponder daily is the time value of money.  My professor, in one of our lectures, began an evening of instruction with a question:  Would you take this $20 bill today, or would you wait 5 years and possibly have a more highly valued $20 bill?  Let's say there was a chance that the dollar gained so much that in 5 years it could be worth significantly more money.  We all thought about the question and unanimously agreed that we would grab it today!  After that he spent the next hour demonstrating through exponents and equations, why our answer was the most practical and wise decision.

Today, in real estate, I can related my theories of time and value, to real estate and interest rates.  During the last 18 years of being in the mortgage industry, I have helped countless borrowers purchase property.  I helped them purchase property when rates were 8% during the internet boom and when rates were under 3%, right after the great recession in 2009.  In either case, if I look back and calculate their mortgage interest they have paid versus the value they have earned as well as the advantages of taxation, not paying rent and the opportunity cost of instead keeping their 20% down payment in the bank, I can, without a doubt, determine that they are better off economically.  If, instead, they would have forgone purchasing that $1,000,000 property (in both 2009 and 2000), and would have kept their $200,000 in a money market for that amount of time, the calculation of appreciation (interest earnings compounded) is staggeringly depressive.

If you had placed $200,000 in a money market, with interest after 10 years it maybe would be about $250,000. By contrast, a single family home in the Castro purchased in 2000 for $1 million would most likely have doubled in value, gaining you an additional $1 million in capital. So if you tried to buy that same house now, the down payment would have at least doubled as well. When you also factor in that you may be paying down your principal, as well as not paying out thousands of dollars a month on rent, the long-term value of your investment becomes even clearer.

In the end, the risk of diving into the market and the gain obtained, far exceeded the gain of not taking action, not purchasing, waiting in other words, for a better time to enter and purchase.

It seems my professor was correct, in that as we use our money today, inevitably we do reap the benefits of taking action in the present, in order to reap the future value of investment.   So I end my thoughts with a more theoretical analysis of a $1, a lump sum, or a down payment, utilized today, appears to certainly have beneficial values into the future.


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