http://www.commercialrealestateloansnow.com/why-do-people-use-discounted-cash-flows-to-value-commercial-real-estate/ Your Source for Commercial Real Estate Loans Tue, 16 Feb 2010 12:32:17 +0000 hourly 1 http://wordpress.org/?v=3.0 http://www.commercialrealestateloansnow.com/why-do-people-use-discounted-cash-flows-to-value-commercial-real-estate/comment-page-1/#comment-685 Baby Sleep Positioners Sat, 25 Apr 2009 00:57:30 +0000 http://www.commercialrealestateloansnow.com/why-do-people-use-discounted-cash-flows-to-value-commercial-real-estate/#comment-685 Appraisers, analysts and some investors use the discounted cash flow to value real estate because they have established a correlation between the value of the cash flow over the holding period and the value of the real estate at the present time. The most reliable discount rate is market derived. In other words, the rate is the result of analyzing actual transactions of similar properties. A discount rate may also be constructed by adding the weighted values of the interest rate(s) of mortgages and equity investment rates. For example, if the interest rate for a mortgage for a similar property is 10%, and the loan to value ratio is 70%, the weighted mortgage rate is 7% (0.10 X 0.7). If the equity investment rate is 15%, the weighted equity rate is 4.5% (0.15 X 0.30). The discount rate is the sum of these two rates, or 11.5%. Appraisers, analysts and some investors use the discounted cash flow to value real estate because they have established a correlation between the value of the cash flow over the holding period and the value of the real estate at the present time.
The most reliable discount rate is market derived. In other words, the rate is the result of analyzing actual transactions of similar properties.
A discount rate may also be constructed by adding the weighted values of the interest rate(s) of mortgages and equity investment rates. For example, if the interest rate for a mortgage for a similar property is 10%, and the loan to value ratio is 70%, the weighted mortgage rate is 7% (0.10 X 0.7). If the equity investment rate is 15%, the weighted equity rate is 4.5% (0.15 X 0.30). The discount rate is the sum of these two rates, or 11.5%.

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