Discounted Cash Flow

An investment analysis tool used regularly by real estate professionals to make buy, sell, hold, and development investment decisions. The discounted cash flow (DCF) is a process by which the real estate professional forecasts the future cash flows of an investment (rents, expenses, CapEx, debt service, sale price, etc), and then discounts those cash flows to present to arrive at time value of money return metrics such as internal rate of return and net present value.

The estimated cash flows from the DCF can also be used to calculate other risk and return metrics such as debt service coverage ratio, breakeven occupancy, debt yield, cash-on-cash return, equity multiple, etc, as well as perform other analysis such as sensitivity analysis.

The most common non-Excel DCF software used in real estate is created by the Altus Group and is called ARGUS. An example of a DCF in Microsoft Excel is the A.CRE All-in-One Underwriting Model for Real Estate Acquisitions and Development.