ABSTRACT
Chapter 2 of Practical Finance for Property Investment examines the valuation of investment property. Readers of this chapter will gain familiarity with all of the various sources of property income as well as how to value future income today. The chapter’s emphasis is the discounted cash flow approach to property valuation, but this approach is also compared and contrasted with valuing property using direct capitalization. Readers will be introduced to the most common property metric used in practice – the cap rate – and gain an appreciation for the circumstances in which a cap rate is useful and, perhaps more importantly, those in which it is not useful. The discounted cash flow valuation method introduced in this chapter is the foundation of all investment decision making. Traditional returns-based decision making is also discussed and critiqued. In conclusion, the chapter presents a case study where pro forma cash flow forecasts prepared by real estate professionals form the starting point for the valuation of an office property.
