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How Does the Time Value of Money Work?

“The best time to invest is when you have money. This is because history suggests it is not timing which matters, but time.” — Benjamin Graham

I’ve spoken one-on-one to over 1,500 investors.

The issue of money’s time value comes up a lot in those conversations.

What happens if you invest now versus invest later?

Are there more benefits to getting some early money back in a deal versus waiting until the end?

How do those factors affect your returns and how you approach deals as an investor?

I’ve educated many confused investors on deal structure.

So, if you’re struggling to conceptualize the time value of money, you’re not alone.

We’re going to talk about it today.

What you learn will be incredibly valuable for your investments.

Let’s jump into it!

1. What is the Time Value of Money?

The money in your pocket today is more valuable than money will be in 10 years.

Inflation is eroding the value of your dollars.

Dollars in the future will be worth less regardless of what you do.

However, producing an investment return will help you fight inflation.

The time value of money depends on when you get paid in a deal.

If you get your investment returned to you sooner, you can reinvest.

It’s a very simple principle, but many get confused by the concept.

You don’t want your cash sitting around.

Your money should work for you, even during times of inflation.

My friend Mark Moss says there are three certainties in life:

Death, taxes, and inflation.

Inflation is inevitable.

Your money will lose purchasing power.

Investing in real assets is incredibly valuable.

Let’s get into how this works with an example:

2. ATM Deal vs. Multifamily

We’re going to compare an ATM deal and a multifamily deal.

This comes from my book, Fire Yourself, which just came out.

(Check out the Amazon bestseller here!)

In a multifamily deal, you’ll typically have some cash flow along the way.

You invest after a period of time.

Some cash will come in.

You’ll get a big lump sum at the end, getting back most of your return plus your principle.

Numbers-wise, you’re looking to get back 70% to 80% of the money you invested.

This is all dependent on the deal going well, of course.

Let’s move onto an ATM deal:

In an ATM deal, you will get paid pretty quickly, usually after three or four months.

You will then receive a preferred return payment every single month

And at the end of the deal, there is no big lump sum.

Now you may be wondering: Which deal is better?

The answer isn’t an exciting one.

The better deal depends on your situation.

For example:

There’s a 7-year ATM fund deal that has about the same return as a multifamily deal.

In that scenario, the multifamily deal may look better because it’s a shorter return.

But here’s the twist:

Even then, the multifamily deal may not be the better solution.

The total average annual return of an ATM deal is typically around 12%.

That’s not super high as far as an average annual return.

The important factor to keep in mind is when you get paid.

If you get paid back more money earlier, you can take those funds and reinvest them in another deal.

This is called an internal rate of return, or IRR.

In my opinion, the most important number in a deal is not the average annual return or total deal return or equity multiple.

The most important number in a deal is the IRR.

If your money is not working for you, then you can get the money back and go reinvest it.

You can also see this at work with two similar deals.

Let’s say I have two five-year multifamily deals with two equity multiples.

That means $100,000 becomes $200,000 in five years.

In the first deal, you get nothing back for 5 years.

At that time, you also double your money and get your principal back.

That’s a pretty awesome deal!

What about that other multifamily investment?

With the second deal, let’s say you got 90% of your capital back and your principal back in year one.

That means you only have $10,000 that you’re waiting on for the remaining 4 years.

Are those two multifamily deals the same?

Overall, yes, they are the same.

They both are a 2.0 equity multiple.

They both last five years.

But if you look at them individually, you see after one year you had $190,000 back in your pocket that you can reinvest.

With that in mind, the second deal comes across way better.

You need to pay attention to the IRR and how hard your money is working for you.

3. Why Cash Flow Deals Help With This

Cash flow helps with time value.

With deals, cash flow does two things.

Firstly, it helps reduce your basis in a deal.

I’d much rather have cash flow as soon as possible than to make tons of money someday down the road.

That “someday down the road” is speculative.

I can’t cover expenses on money that may or may not be there.

Quarterly checks and distributions help pay expenses.

Cash flow also lowers your risk.

If something bad happens with a deal, you’ve already received a portion of your capital back.

Our ATM fund has become my favorite cashflow deal.

Right now, the deal projects around a 19% IRR.

Historically, it’s been predictable and reliable.

That doesn’t mean it couldn’t miss in the future, but so far, it’s been great!

Cash flow each month also reduces the amount of money invested.

This is especially true if you’re getting some of your principal back along the way.

In summary: Get your funds working now.

If you’re not in real assets, get in real assets.

When you look at deals, look at the total returns.

Develop cash flow as soon as you can.

As Warren Buffett says: “Unless you learn how to make money while you sleep, you’ll work until you die.”

Get cash flow in your life so you won’t have to grind away every day.

Now I want to hear from you!

How will you achieve cash flow?

Have you invested in real assets yet?

Let us know in the comments.

Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.

If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.

Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.

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