CRE 101 · deweyluong.realtor

Discounted Cash Flow (DCF) Explained: What a Georgia Commercial Property Is Worth When You Price Every Year, Not Just Year One

A cap rate prices one year. A discounted cash flow analysis prices every year of the hold plus the sale at the end — and the two can disagree by six figures on the same building. On the made-up Gwinnett property on this page, five years of growing NOI discounted at 8% plus the discounted sale proceeds give a value of $2,900,849 against a $2,900,000 asking price — a margin of $849. Raise the discount rate one point to 9% and the same property is worth $2,784,405. The building did not change. The assumptions did, and DCF is the tool that shows exactly which assumption moved the price. By Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 318 closed sales / $281.2M career volume · 678-707-2498

The worked example uses made-up, rounded numbers to teach the mechanics. This page is general education, not financial or legal advice.

What a DCF is — and what it is not

• The idea: project the property's cash flow for each year of the holding period, project the net sale proceeds (the reversion) at the end, then discount every one of those future dollars back to today at a discount rate that reflects the risk. The sum is the value those cash flows support today.
• Why one year is not enough: direct capitalization (NOI ÷ cap rate, see the cap rate lesson) assumes year one repeats forever. It cannot see a lease expiring in year three, a step-up in rent, a roof in year four, or a sale priced off a different exit cap. A DCF sees all of it, year by year.
• The discount rate is the opinion: the cash flows are arithmetic; the discount rate is judgment. It is the total return the investor demands for tying money up in this property instead of an alternative of similar risk — which is why two honest buyers running the same rent roll can land six figures apart.
• What it is not: a DCF is not an appraisal and not a prediction. It is a disciplined statement of what the property is worth IF the projections and the discount rate are right. Garbage projections discounted precisely are still garbage.

The five inputs that decide a DCF

• Year-by-year cash flow: rent, vacancy, expenses, and below-the-line items like replacement reserves and leasing costs for each year — built from the rent roll and T-12, not from the seller's brochure year.
• Growth assumptions: how much NOI grows each year. Contractual rent escalations are evidence; a hopeful 5% a year with no leases behind it is fiction.
• The holding period: how many years until the sale. Five and ten years are the common frames; the answer changes with the frame.
• The exit (terminal) value: the year after the sale, that year's NOI is capitalized at an exit cap rate to estimate the sale price, then selling costs come off. In most DCFs this one number is the majority of the value — treat it with the most suspicion.
• The discount rate: the required total return. It should sit above the cap rate by roughly the expected growth — a property bought at a 6.5% cap with 3% growth is priced for something near a 9–10% total return before the math is argued down.

Worked example. The numbers below are made up and rounded to teach the mechanics. This is not a real property.

• The property: a Gwinnett income property asking $2,900,000. Year-one NOI is $180,000, growing 3% a year on contractual bumps: $185,400 in year 2, $190,962 in year 3, $196,691 in year 4, and $202,592 in year 5.
• Discounting the operating years at 8%: $180,000 ÷ 1.08 = $166,667; year 2 = $158,951; year 3 = $151,592; year 4 = $144,574; year 5 = $137,881. The five operating years are worth $759,665 today. Notice the pattern: the biggest year (year 5) contributes the least of the later years, because a dollar in five years is worth about 68 cents today at 8%.
• The reversion: year-six NOI is $208,670 ($202,592 × 1.03). Capitalized at a 6.5% exit cap, the gross sale price is $208,670 ÷ 0.065 = $3,210,308. Less 2% selling costs, net reversion is $3,146,102. Discounted five years at 8% (÷ 1.4693), that sale is worth $2,141,184 today — 73.8% of the total value. Read that again: in a typical DCF, most of what you are buying is the exit.
• The answer: $759,665 + $2,141,184 = $2,900,849. Against the $2,900,000 ask, net present value is +$849 — the deal clears its 8% hurdle by less than a rounding error. This is a fairly priced property at an 8% required return, not a bargain.
• The sensitivity that matters: rerun the identical cash flows at a 9% discount rate and the value falls to $2,784,405 — $115,595 under the ask. One point of required return erased six figures. That is why DCF negotiations are really discount-rate and exit-cap negotiations wearing a price costume, and why the IRR lesson and this one belong together: IRR is the discount rate that makes this same model's NPV exactly zero.

Four DCF traps

• The hockey-stick projection: flat years one and two, then 6% growth forever, with no leases signed to support it. Every projection year should trace to a lease, a market rent study, or a labeled assumption — and the labeled assumptions are where the price argument lives.
• An exit cap lower than the entry cap with no story: selling at a richer cap rate than you bought at assumes the next buyer will pay more for the same income. Sometimes true in a falling-rate market; as a default assumption it is how models manufacture profit.
• Forgetting what sits below NOI: reserves, tenant improvements, and leasing commissions are real cash out the door. A DCF built on raw NOI with no capital line overstates every year and the exit with it.
• Precision theater: a value stated to the dollar — $2,900,849 — is arithmetic, not accuracy. The honest output is a range: this property supports roughly $2.78M–$2.90M across an 8–9% discount band, and the negotiation is about where inside that range the risk actually sits.

Cho nhà đầu tư người Việt

Discounted Cash Flow (DCF) là phương pháp định giá bất động sản thương mại bằng cách dự phóng dòng tiền từng năm trong suốt thời gian nắm giữ, cộng với số tiền bán ròng ở cuối kỳ (reversion), rồi chiết khấu tất cả về giá trị hôm nay theo một tỷ lệ chiết khấu (discount rate) phản ánh rủi ro. Ví dụ trên trang này (số liệu giả định): NOI năm đầu $180.000, tăng 3%/năm theo điều khoản leo thang trong hợp đồng thuê, đạt $202.592 vào năm thứ 5. Chiết khấu ở 8%: năm năm vận hành trị giá $759.665 hôm nay. NOI năm thứ 6 là $208.670; chia cho exit cap 6,5% được giá bán gộp $3.210.308; trừ 2% chi phí bán còn $3.146.102; chiết khấu năm năm còn $2.141.184 — chiếm 73,8% tổng giá trị. Cộng lại: giá trị DCF = $2.900.849, so với giá rao $2.900.000 thì NPV chỉ +$849. Tăng discount rate lên 9%, cùng một tòa nhà chỉ còn đáng giá $2.784.405. Ba lưu ý: phần lớn giá trị nằm ở kỳ bán lại nên exit cap là giả định cần soi kỹ nhất; mọi năm dự phóng phải bám vào hợp đồng thuê thật, không phải hy vọng; và kết quả DCF nên được đọc như một khoảng giá trị, không phải một con số tuyệt đối. Đây là thông tin giáo dục chung, không phải tư vấn tài chính hay pháp lý.

Frequently asked questions

What is discounted cash flow (DCF) analysis in commercial real estate?

DCF analysis values an income property by projecting its cash flow for each year of the holding period plus the net sale proceeds at the end, then discounting all of those future dollars back to today at a rate reflecting the risk. In the worked example on this page, five years of NOI growing 3% from $180,000, discounted at 8%, are worth $759,665 today, and the discounted net reversion adds $2,141,184, for a total value of $2,900,849.

What is the difference between a cap rate and a discount rate?

A cap rate prices one year: value = NOI ÷ cap rate. A discount rate prices every year of a DCF plus the sale. The discount rate is a total return (income plus growth), so it normally sits above the cap rate by roughly the expected NOI growth — a 6.5% cap with 3% growth implies something near a 9–10% discount rate before adjustments for risk and capital costs.

What discount rate should I use in a DCF?

The discount rate is the total return you require for this property's risk versus your alternatives — there is no single correct figure, which is the point of running a sensitivity: in the worked example, moving from 8% to 9% cuts the supported value from $2,900,849 to $2,784,405. Anchor the rate to the entry cap plus realistic growth, then adjust for lease rollover, capital needs, and market risk, and negotiate off the range, not a single point.

Why is the sale (reversion) such a large part of a DCF value?

Because the buyer at the end of the hold is purchasing all the years after your hold in one payment. In the worked example the discounted reversion is $2,141,184 of the $2,900,849 total — 73.8%. That is why the exit cap rate is the most consequential assumption in the model: a half-point move in the exit cap changes the gross sale price by hundreds of thousands of dollars on a property this size.

DCF là gì, nhà đầu tư người Việt cần lưu ý gì?

DCF (Discounted Cash Flow) là phương pháp định giá bằng cách dự phóng dòng tiền từng năm cộng tiền bán ròng cuối kỳ, rồi chiết khấu về hôm nay theo discount rate phản ánh rủi ro. Ví dụ trên trang này (số liệu giả định): NOI năm đầu $180.000 tăng 3%/năm, đến năm thứ 5 là $202.592; chiết khấu 8% thì năm năm vận hành đáng giá $759.665 và tiền bán ròng đã chiết khấu là $2.141.184 (73,8% tổng giá trị), tổng giá trị DCF $2.900.849 so với giá rao $2.900.000. Ở discount rate 9%, giá trị chỉ còn $2.784.405. Ba lưu ý: exit cap là giả định quan trọng nhất vì phần lớn giá trị nằm ở kỳ bán lại; dự phóng phải bám hợp đồng thuê thật; và hãy đọc kết quả như một khoảng giá trị. Đây là thông tin giáo dục chung, không phải tư vấn tài chính hay pháp lý.

This page is general education, not investment, legal, tax, lending or financial advice. Every figure in the worked example is made up and rounded to teach the mechanics. Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 678-707-2498 · dewey.luong@serhant.com