Problem
Time Value of money (TVM) calculations are tools used for making financial decisions. These tools can be utilized in business financial decisions or in your personal life. Using these tools when making financial decisions will ensure that the decision being made is financially sound. I personally, have not used these types of tools in my personal or professional life however I do see where they would be extremely helpful.
For example, I recently purchased a new home. I have not decided yet what to do with my current home, I could sell it and use the profits towards the new mortgage, or I could rent it out and use the additional income towards payments of the new home. TVM calculations can help me understand which decision will have the best payout.
The total value of the mortgage over the life of the loan is $129,735.00. This includes the principal and interest payments. If I sell the home, I will have to pay the remaining balance of my mortgage, which is $90,000. After selling the home, I would have $60,000 in equity to use as a payment on my new home.
If I decide to rent the home, I would be able to collect $1,200 per month in rental income. Over the life of the loan, I could collect $144,000 in rental income and after paying the mortgage off, I would have $54,000 in equity to use as payment on the new home.
Based on the TVM calculations, over the time period of the loan it is better to rent the home rather than sell it. I would receive more money in rental income over the life of the loan and have more equity to use on the new home. However, if I want to maximize the value within the next five years, it would be best to sell the home. By selling the home, I will receive the full amount of equity right away, rather than spread out over the life of the loan.
So really, I think the decision comes down to cash flow. Do I want more cashflow now or later? If I want to maximize the value of the home and have more cashflow immediately, than I should sell. This would give me the most money up front. However, if I'm more concerned with the long-term value, than I would be better off to rent the home. The cash flow would come later, after the paying off the loan.
Based off the above post - how would you compare the FV of investing the proceeds from the sale against the cash flow of the rental to determine the best ROI?