Discounting

Discounting converts money expected in the future into its value today, by dividing by one plus the required rate of return for each year of waiting. It is how investors compare a stream of future NOI against the price paid now.

At an 8% discount rate, $28,892 of NOI next year is worth about $26,750 today. Five years out, the same amount is worth under $20,000. Income further in the future counts for less, which is why the timing of rent increases matters.

The discount rate reflects what else the money could earn and how risky the property is. A higher rate lowers every future dollar and lowers the value. Cap rates and discount rates are linked: in a simple model, the cap rate equals the discount rate minus the expected annual growth in NOI.