Property Valuation
In New Mexico, the 'discounted cash flow' (DCF) analysis for income property determines value by:
ADividing NOI by a cap rate
BCalculating the present value of all projected future income streams and the reversion (sale proceeds) discounted at the investor's required rate of return✓ Correct
CAveraging recent comparable sales
DEstimating replacement cost minus depreciation
Explanation
DCF analysis projects income for a holding period, applies a discount rate to convert future cash flows to present value, and adds the present value of the expected sale price at the end of the holding period.
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Key Terms to Know
Capitalization Rate (Cap Rate)
A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
DepreciationA reduction in the value of an improvement (building) over time due to physical deterioration, functional obsolescence, or external factors.
Net Operating Income (NOI)The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
Math Concepts
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