There is an incredible power in understanding the time value of money. 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. A financial calculator is 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 are obsolete.
Through the hands-on use of a financial calculator the you can learn:
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The present value of a series of cash flows,
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Your yield on a series of payments,
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The cost to finance a house,
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The effect of early payments on home loans,
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The yield on a mortgage,
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The differences between various mortgages,
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How to buy and finance discounted mortgages,
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How to buy real estate at tremendous discounts using notes.
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.
So one major road to success in real estate investing is in understanding the time value of money. You will be amazed at the power in your calculator.