Discount Rate (Yield Rate)
The rate of return required by an investor to attract investment in a particular property, used in DCF analysis to convert future cash flows into present value. Reflects the risk and opportunity cost of the investment.
The discount rate incorporates the risk-free rate (typically U.S. Treasury yields), plus premiums for risk, illiquidity, and management burden associated with real estate investment. Higher-risk properties require higher discount rates. The discount rate can be extracted from market transactions using IRR analysis of comparable sales, or built up from component rates. Unlike the cap rate (which applies to a single year's income), the discount rate accounts for the entire investment period including income growth, expense increases, and the future sale price.
Related Terms
Discounted Cash Flow Analysis (DCF)
DCFA yield capitalization technique that estimates property value by projecting future cash flows (income minus expenses) over a holding period and discounting them to present value using a market-derived discount rate..
Capitalization Rate (Cap Rate)
Cap RateThe ratio of a property's net operating income to its market value or sale price, expressed as a percentage.
Income Approach
A valuation method that estimates a property's value based on the income it generates or is expected to generate.
Net Operating Income (NOI)
NOIThe annual income remaining after deducting all operating expenses from effective gross income, but before deducting debt service (mortgage payments) and income taxes.
More in Income Approach
View allGross Rent Multiplier (GRM)
GRMThe ratio of a property's sale price to its gross monthly (or annual) rental income.
Effective Gross Income (EGI)
EGIPotential gross income minus vacancy and collection losses, plus other income (laundry, parking, late fees).
Vacancy Rate
The percentage of available rental units or space that is unoccupied at a given time.
Market Rent
The rental income a property would most likely command on the open market, based on analysis of comparable rental properties in the area.