it considers the investment over a much longer time frame, which is very important, because youвЂ™ll no-doubt own the property for a long time. If the Capitalisation method is a snap-shot or photograph, then the DCF approach is a movie. For example, a property currently renting at $1,000,000 per annum net, with the market yield running at 7% is worth: $14,285,714. To recap, net income divided by Cap.Rate (yield) equals value (Net Income / Cap.Rate = Value). we considered the current or passing net income and the current yield in the market and then calculated the market value. When we looked at the Capitalisation method, we really just considered a snap-shot in time.

Compare commercial property investments against other asset classes.

Evaluate properties with minimal comparable evidence.

Look at projects that donвЂ™t have current data to capitalise, such as developments, refurbishments, or other value add opportunities.

Add assumptions about growth, market reviews, and terminal values.

Price in and compare properties with different tenant covenants.

Where DCF becomes valuable, is that we can now: IвЂ™ve underlined вЂexpectedвЂ™, because this is one of the biggest criticisms of DCF: you are required to make assumptions, whereas with the Capitalisation method the вЂnumbersвЂ™ are largely known. So, with this in mind, we need to consider the future expected cashflow of a property. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of aВ business during its remaining life.вЂќ You might be familiar with Warren BuffettвЂ™s comment, вЂњ Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness ofВ investments and businesses. The same can be said about equities or companies. The market value of any investment property is simply the present value of all future income that is expected to be realised during the anticipated term of ownership, or investment horizon. The Discounted Cash Flow method of valuing is based on the following understanding: IвЂ™ll even help you build a basic Microsoft Excel spreadsheet that you can adapt for any property youвЂ™re looking at, so letвЂ™s beginвЂ¦ ItвЂ™s an area of valuation that most people are terrified of because it seems too mathematical, but IвЂ™m going to show you how simple and powerful it can be.

This month, I thought weвЂ™d look at Discounted Cash Flow. If you havenвЂ™t had a chance to read it, I suggest you start with Part 1 before continuing below. I hope you all enjoyed last monthвЂ™s article on Capitalisation.

Free property evaluator cash flow