Both the direct capitalization method and the discounted cash flow methods focus on net operating income (a proxy for cash flow) as a key input to the value of a property. In the DCF method, future operating income is discounted to generate a present value. In the direct capitalization method, current NOI is capitalized using the cap rate. An alternative form of direct capitalization uses a gross income multiplier. Terminal valuation under a DCF methodology may use terminal cap rate based on expected NOI at some future horizon. However, this is not used under direct capitalization (of first year NOI).
(Study Session 13, LOS 38.h) |
