Alternative Investments

Value = NOI / cap rate, where NOI is the stabilized first-year net operating income and the cap rate is the going-in capitalization rate.

NOI = potential gross income less vacancy and collection losses, plus other income, minus operating expenses. It is before financing costs and income taxes.

Cap rate = discount rate − growth rate (cap rate ≈ r − g). The cap rate is a current-yield measure, so subtracting expected NOI growth from the required return gives the cap rate.

It estimates value as the cost to buy the land plus the cost to construct a new building, less depreciation (physical deterioration, functional and external obsolescence). It sets an upper bound on value.

It values the subject property by referencing recent sale prices of comparable properties, adjusting for differences in size, age, location, condition, and sale date.

DCF explicitly projects multi-year cash flows (NOI) plus a terminal/reversion value and discounts them at the required return, whereas direct capitalization applies a single cap rate to one year's NOI.