Have A Plan - The Importance of Time Value Money
I closed on a particularly difficult 1031 exchange for a client today, and had a buyer I represent cancel on a deal we had worked equally hard on earlier in the week.
I was reflecting on what made each client different, both were repeat clients who had equally ambitious goals for their investing future, both are incredibly talented and knowledgeable investors - they really are relatively similar in multiple ways. There was one glaring difference between them - one had taken the time to make a basic plan at the beginning of their investing portfolio, and one had not.
I am at an interesting point in my career where I have worked with my clients long enough that many are beginning to go through their first 1031 exchange as they build equity in their properties, the clients that have created a plan are able to recognize noticeably larger gains.
Investors who are plan oriented are able to take a much longer term approach to their investments - a lot of guesswork is taken out of their strategic decisions since the moves they make with their properties are informed by analytic indicators. Those without plans are more likely to make decisions using much more abstract indicators since they do not have the luxury of a set goal they are working towards. In turn, this leads to much more turmoil, more painful escrows, and reactionary thinking during transactions.
If you do not have a plan - don’t fret; I am writing this blog for people who have an aversion to long term planning (I’m one of them, before beginning investing my only real experience had been maxing out my 401k contributions in corporate America every pay period).
I like to familiarize all new investors with the time value money equation. It’s okay if you don’t remember it from middle school math, not many people do. Here’s a quick refresher:
FV=Pv(1+r)^n
Fv=Future Value
PV=Present Value
R=Rate of Return
n=time
Any one interested in investing can then work Backwards and create a rudimentary plan since they have 3 Variables already identified; FV- how much they want to be worth, N- when they want to be worth that much, and PV- how much they are worth currently. They could say-“I want to invest ___ dollars over over ____ years and be worth _____ dollars at the end of my plan.
That leaves us one variable to solve for- r or rate of return. Investors can then look for projects where they can hit their own specific rate of return over the life of their portfolio. The great thing about investing is that we can use leverage to create huge returns on our portfolio, if used correctly (and conservatively) any investor can expect to sustain a strong rate of return over the life of their portfolio that will help them achieve their financial goals.
I’ve included a time value money calculator link below so you can see what your own return needs to be over the life of your portfolio!
If you have questions about how to identify properties that meet your goal return number reach out! I’d be happy to help you find them.
Happy Investing!
john Alden
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