Present Value

Present value expresses money you expect to receive later in today's dollars, by discounting it at the return you require. Every property valuation is a present value calculation. The cap rate method is a shortcut that assumes NOI continues at a steady rate indefinitely.

Discount one year of the sample property's NOI, $28,892, at an 8% required return and it is worth roughly $26,750 in today's money. Each later year is worth less again. Adding all those discounted years together, along with a sale at the end, gives the value in a discounted cash flow model.

Direct capitalization reaches a similar answer in one step. Dividing NOI by a cap rate gives the present value of steady income that continues forever. It works well for stable property. For income that will change, a year-by-year present value is more accurate.