Discount Rate - DCF analysis

[Eric Lee]

Something that has always made me curious is the discount rate real estate investors use in their DCF analysis. If you are a buy and hold investor, due you use the stock market average (e.g. S&P500, index fund, etc.) or do you use the risk free rate from a bond/treasury. If there has never been a 20 year period where the bond market has out performed the stock market, then the stock market would have higher short term volatility, but be truly the better long term risk free rate.

Conversely, if you plan to possibly sell the property in less than 10 years do you assume a discount rate more similar to the bond/treasury market.

Knowing in either scenario, said investor should be doing an analysis to determine which path/option is best and that discount rate is a simplified margin of safety in an investment.

[Steve Vaughan]

Leveraged, my COC minimum return is in the teens. My average with multis is 17%, houses about 12%.

Unleveraged my ROE is only about 7.5%. I'm ok with that because of the flexibility of RE ownership, tax advantages and equity capture from buying with cash. This bumps my average IRR at exit up into the high teens and often mid twenties for shorter term (under 5 yr) value-add holds.

If not borrowing though, I'd stick to mutual funds.  RE takes too much time, knowledge and hassles to beat 'the market' consistently while compensating for time, effort and risk.

Comparing 'risk-free'/inflation rate treasury returns to RE isn't similar to me.  Risk and hassle are too much greater.  I factor inflation into returns of course, but it's apples and caviar here.  Can't settle for returns equalling inflation in equities or RE.