Discounted Cash Flow Analysis (DCF)
A yield capitalization technique that estimates property value by projecting future cash flows (income minus expenses) over a holding period and discounting them to present value using a market-derived discount rate.
DCF is more detailed than direct capitalization and accounts for varying income streams, expense changes, and a terminal value (reversion) at the end of the holding period. The appraiser projects annual cash flows for a typical holding period (often 5-10 years), estimates the sale price at the end of the period (using a terminal cap rate), and discounts all future values to present using an appropriate discount rate. DCF is preferred for properties with complex income patterns, lease rollovers, or anticipated changes in income and expenses. It is more common in commercial appraisal but is also used for multi-unit residential properties.
Related Terms
Income Approach
A valuation method that estimates a property's value based on the income it generates or is expected to generate.
Capitalization Rate (Cap Rate)
Cap RateThe ratio of a property's net operating income to its market value or sale price, expressed as a percentage.
Net Operating Income (NOI)
NOIThe annual income remaining after deducting all operating expenses from effective gross income, but before deducting debt service (mortgage payments) and income taxes.
Discount Rate (Yield Rate)
The rate of return required by an investor to attract investment in a particular property, used in DCF analysis to convert future cash flows into present value.
More in Income Approach
View allGross Rent Multiplier (GRM)
GRMThe ratio of a property's sale price to its gross monthly (or annual) rental income.
Effective Gross Income (EGI)
EGIPotential gross income minus vacancy and collection losses, plus other income (laundry, parking, late fees).
Vacancy Rate
The percentage of available rental units or space that is unoccupied at a given time.
Market Rent
The rental income a property would most likely command on the open market, based on analysis of comparable rental properties in the area.