Investment Basics

The time value of money means that a dollar today is worth more than a dollar in the future, because you can invest it now and earn interest. In other words, money has more value when you have it sooner, since it can grow over time. For example, if someone gives you $100 today and you put it in a savings account that earns 5% interest per year, you’ll have $105 in a year. But if they offer you $100 a year from now instead, you miss the chance to earn that extra $5—so $100 today is actually worth more than $100 in the future.

The discount rate is the interest rate used to figure out what future money is worth today. It’s a key part of the time value of money, which says that money now is more valuable than the same amount later because you can invest it and earn more. When investors look at future cash flows from a property, they "discount" them back to today’s value using the discount rate. A higher discount rate means you’re being more cautious, it lowers the value of future money because you're expecting higher returns or more risk.

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For Example:
If you expect to earn 10% per year, then $1,000 received a year from now is only worth about $909 today (because $909 × 1.10 = $1,000).  In other words, $909 invested at 10% for one year will become $1,000. So that $1,000 that you will received in one year's time is worth $909 of today's dollars. That 10% is your discount rate.

 
The discount rate helps you decide if an investment is worth it. If the present value of the future returns (using your chosen discount rate) is higher than the cost of the investment, it’s likely a good deal.

IRR is a way to measure how profitable an investment is over time. It tells you the average yearly return you’d earn on your money, taking into account when you get paid back. The higher the IRR, the better the investment, generally speaking. For example, let’s say you invest $1,000 into a real estate project. Over the next 3 years, you receive $400 each year. At the end of those 3 years, you’ve received $1,200 total. The IRR is the interest rate that makes those $400 payments add up to exactly $1,000 when you calculate their value back in today’s terms. In this case, the IRR is about 9.6%, meaning your investment earned you about 9.6% per year, on average. You should learn to look at investments using IRR because it shows you how much you're really earning each year, considering both the amount and the timing of your returns. Getting money back sooner is more valuable than getting it later, and IRR helps you compare different investments fairly, even if they pay out in different ways or over different time periods. It helps answer the question: "Is this a smart place to put my money compared to other options?"

Comparing IRR to Annual Return (Simple Average)
IRR is a way to measure how much your investment really earns each year, taking into account when you get your money back. It’s like an average annual return, but smarter because it gives more weight to money you get sooner (which is more valuable). Annualized Return just divides total profit by the number of years, without caring when you receive the money, whereas IRR factors in the timing of each payment—so getting cash earlier makes the IRR higher.

For Example:
Assume you invest $10,000:

• If you get $5,000 back every year for 2 years, the total return is $10,000.

  • Annualized return: 50% per year (because $10,000 total ÷ 2 years = $5,000 per year).

  • IRR: Closer to 41%, because the first $5,000 comes sooner, and the second is less valuable in today’s terms due to the "Time Value of Money" (see above), the cost (the interest or return that you could have earned on the second $5,000 if you had received it earlier and invested it right away). You might think of it like a negative interest rate (it's known as a Discount Rate). 

Therefore, IRR gives a more realistic view of how your investment performs over time, especially when the cash flow isn’t the same every year. It’s great for comparing real estate deals, where money comes in at different times.

CoC (also called the Cash Yield) tells you how much money you’re making each year compared to how much cash you've invested. It’s a simple percentage that shows how hard your money is working for you on a yearly basis. For example, If you invest $50,000 of your own money into a rental property and it gives you $5,000 in cash flow each year, your Cash-on-Cash Return is 10% ($5,000 ÷ $50,000). That means you're earning 10% of your investment back in cash every year. The Cash-on-Cash Return helps you understand what kind of income you're actually putting in your pocket each year. It’s especially helpful if you're comparing properties or want to see how much return you’re getting from your own money, not including the potential appreciation of the value of the property.

The Equity Multiple (also called the Cash Fow Multiple or Profit Multiple) tells you how much total money you’ve made on your investment compared to what you originally put in. It includes all the cash flow, profits, and the money you get back when the investment ends, not just yearly returns. For example, If you invest $50,000 into a real estate project and, over a few years, you receive a total of $100,000 back (including your original investment), your Equity Multiple is 2.0x. That means you doubled your money. The Equity Multiple gives you a clear, simple picture of your total return. It’s especially useful when comparing long-term investments that might have different timelines or payout structures.