Discounted Cash Flow (DCF)

A discounted cash flow model forecasts each year of net operating income for the time you plan to own, adds an estimated resale price in the final year, then pulls all of it back to present dollars using your required return. It is what replaces single-year NOI divided by a cap rate when rents, expenses or vacancy are expected to change.

Direct capitalization, $28,892 divided by 6.5% for $444,492, assumes this year's NOI is representative. A DCF model instead lays out ten years of NOI, say $28,892 growing 3% a year to $37,700, plus a reversion value in year ten, and discounts each figure at perhaps 9%. The answer can land above or below the cap rate value depending on the growth and discount assumptions, which is both the strength of the method and its weakness.

The Wikipedia page treats DCF as a general finance tool, with NPV and IRR covered alongside it. In real estate, the inputs are still NOI. Every year of the projection is an NOI line, built from the same rent, vacancy and expense assumptions the calculator uses, just repeated with growth rates applied. A DCF built on an NOI that omits reserves and management compounds the error for ten years.