Time Value of Money

The principal of the Time Value of Money is honestly a simple one in that due to inflation the value of a dollar will drop.  Case in Point, I remember buying a can of soda for 25 cents.  Now a can of soda in some vending machines are as much as $1.  While that is not all inflation the principal is the same.  

Why is this important in real estate?  Lets say you buy a property for $100,000 on a 30 year mortgage.  You will be making a ball-park payment of $500 per month.  After 30 years with a 5% interest rate the $100,000 loan in today's money will be  $15,451 in 30 years from today's money.  

How did we get this?  If we take our $100,000 at 5% in one year our $100,000 will be $105,000 ($100,000 x 5%).  The inverse of this is that in one year money will be cheaper and our $100,000 of today's money is only worth $95,238. ($100,000 divided by 5%) The key thing to remember is that all of this money is equal in spending power but the amount changes due to the Time Value Principal.  

What is happening is we are using cheaper money to pay off our debts.  This allow us to effectively get ahead if we hold loans longer.