What is discounted cash flow and why is it important

Real estate investors buy properties that they hope in the future will earn them a considerable return.

To truly understand what that value is, investors can use discounted cash flow to estimate the value of that home in the future, with future cash flows in mind, during the time period they own it.

What is discounted cash flow analysis?

Discounted cash flow is a metric used by investors to determine the future value of an investment based on its future cash flows.

For example, if an investor buys a house today, in 10 years, they hope it will sell for more than what it is worth today. But that’s not the only income — or expense — generated by the property. If the home is utilized as a rental property, cash comes in. If the investor plans a renovation, money goes out. All of this is cash flow. It helps determine the future value of a home for an investor. The discounted cash flow helps investors figure out what that future value of the cash flow is.

Discounted cash flow helps investors evaluate how much money goes into the investment, the timing of when that money is spent, how much money the investment generates, and when the investor can access the funds from the investment.

The formula will take into account Initial cost, annual cost, estimated income, and any necessary holding period.

Read the full article on Stessa’s blog.