It’s good to finally post
again. I have recently finished reading What
Every Real Estate Investor Needs to Know About Cash Flow…and 36 Other Key
Financial Measures, by Frank Gallinelli. Gallinelli’s book is a well-known,
highly respected “must read” for those who are looking to understand the basics
of commercial real estate property valuation. Having read a number of books on
real estate, I have come to two realizations—1) Books on investment property
metrics and valuations, by and large, are very similar, 2) I secretly enjoy
reading books about real estate. At first, I thought I was reading for
informational purposes, but having read about NOI for at least the 20th
time, I have finally admitted to myself that I enjoy doing so. Now let’s get to
the meat and potatoes.
Discounted Cash
Flow (DCF), Net Present Value (NPV) and Profitability Index are all measures of
the value of investment property cash flow. The DCF is derived from the sum of
a property’s cash flows, present or projected, discounted to the present.
Discounting the value of a cash flow is necessary, due to the time value of
money, which accounts for the fact that money today is more valuable than money
in the future. An in depth discussion of the time value of money is beyond the
scope of this post, but I am more than happy to write a post on it, if I
receive a few request for one in the comments below.
