Hello, fellow investors!
Is anyone familiar with the "discounted cashflow" method for evaluating commercial properties, and if so, would you share the formula for doing so (if its not too complicated a formula of course...) Or if possible recommend a good resource where I might be able to get formula? I'd greatly appreciate it. Looking to get into multi-femily investing and I'll want to apply this formula I examine some deals. I do know that this is a more in-depth for of analysis (I've heard some people refer to this as tear-II analysis.) I understand there are supposed to be three tears of evaluation for sifting down and separating the good commercial property deals from the rest of the scrap. thank you all! Long live BP!
I would encourage you to name your thread a more specific name as to get the best results. I would call this post "discounted cash flow question" it might invoke a better response on the front end. In my opinion.
With that said I would read anything by Ben Leybovich and listen to his BP podcast I think it was 60 something. He explains the whole commercial cash-flow stuff very well.
That is great advice Joshua. Now that you've mentioned it, the title is quite generic. I'll be more specific next time. Gotcha on the book and the pod cast! Will do. thx.
In simple terms, cap rate = price / net operating income. Beyond that, there are countless other considerations. Are the financials trailing 12 month actuals, pro formas, or something else? Is there deferred maint. which is driving NOI higher, but leaving the buyer w/ larger future expenses? How much potential is there to force appreciation? How are rents, occupancy, etc. compared to submarket? Bottom line, if you just use a formula w/o question all the numbers and assumptions buried in it, you're at risk of getting burned.
A DCF Model is a fairly straightforward method to estimate the present value of all future cash flows, including the reversion. If you're familiar with finding the net present value (NPV) of future cash flows, it is nearly identical- determining what to use for the annual cash flows becomes the important part. Discount those figures using a a fair rate for your asset type/quality/market to find the present value.
To estimate you cash flows just break it down to the basics and take your market rents, less operating expenses (All of them...) and you've got a number close enough to be dangerous. Add on the expected value when you sell at the end of the holding period and you're set.
Wow! So much valuable insight! Thank you Chris an Alex for your contribution! I will no doubt be able to move forward with more confidence when the time is right. I'll need all the knowledge and advice I can get my hands on! Thanks for the support. We all had to start somewhere... God bless.
You must be a BiggerPockets member to post on the forums
Join the world's largest, most open Real Estate Investing Community online, 100% free forever!