Property Valuation
What is 'direct capitalization' versus 'discounted cash flow' (DCF) analysis in income property valuation?
AA. Direct capitalization is for residential; DCF is for commercial only
BB. Direct capitalization converts a single year's NOI into value (NOI ÷ Cap Rate); DCF projects multiple years of income and discounts it to present value—DCF is more comprehensive for complex properties✓ Correct
CC. They produce identical value conclusions in all cases
DD. Direct capitalization is required by Hawaii law; DCF is optional
Explanation
Direct capitalization divides a stabilized NOI by a market cap rate to estimate value—simple and widely used for stable income properties. Discounted Cash Flow (DCF) analysis projects income and expenses over a holding period, then discounts all future cash flows (including reversion/sale) to present value using a discount rate. DCF is more appropriate for properties with changing income or significant lease-up periods.
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