There are simple and professional methods for valuing an income-generating real estate asset. Simple methods primarily involve determining the market price with minor adjustments based on comparable asset transactions. This can be done through comparisons based on costs, sales transactions, or rent/price multipliers. However, the current market price may differ from the fair, or long-term market price.

Fair value estimation, as with an organization, is determined using discounted cash flows, though specific nuances need to be considered.

Similar to an organization, future cash flows are divided into two parts: the near term (5–10 years) and the long-term (sustainable period). The formula is as follows:

PV = PV (NOI) + PV (REV)

Where:

  • NOI – Net Operating Income
  • REV – Reversion Value, or Resale Value

There are three different methods to calculate REV, and depending on assumptions, the valuation can result in three different outcomes. This is why it is crucial to analyze from multiple perspectives.

Calculating the first year NOI can be straightforward by subtracting all associated expenses from revenues. However, it is essential to calculate cash flows, not accrual-based figures.

To calculate NPV(NOI), certain assumptions are required:

  1. Revenue growth rate.
  2. Discount rate.

Revenue growth in the early years can be modeled with specific figures, while for the long term, long-term inflation can be used—e.g., in the model, I used 2.5% (USD).

The discount rate was derived as follows:
Rfr + beta * MRP + Crp = 4% + 0.75 * 5.5% + 1% = 9.1%.

The Three Methods to Calculate REV:

1. Long-term CFD Method:

If the property is a capital asset with a lifespan exceeding 50 years, a perpetual discounting method is used:
REV[9] = NOI[10] / (r – g) (This is based on a 10-year forecast model.)

2. Cap Rate Method:

Cap Rate = NOI / Value:

Based on this, an assumption can be made about the Cap Rate after nine years. For example:

წყარო:

https://www.cbre.com/insights/reports/us-cap-rate-survey-h1-2024

3. Property Price Growth Method:

The third approach is to assume the property price will grow at a certain rate, reaching a specific level in nine years. Mathematically, since we don’t know the asset’s current value, we use known data:

  1. PV (V) = PV (NOI) + PV (REV)
  2. REV = PV (V) * (1 + g)^n

Summarizing the Three Results:

To align these differences, it is crucial to understand how sensitive the final result is to assumptions about discount rates, growth rates, and capitalization rates:

Excel Model:

This is adapted from the source:
Real Estate Finance & Investments by William B. Brueggeman and Jeffrey D. Fisher.