In other words, the
discount rate is the property yield rate and includes a component
related to annual income (read an annual dividend with stocks or,
alternatively, NOI with real estate) and appreciation at resale
(future stock price with stocks or, alternatively, future sales /
reversion price of the property at the end of the investment term with
real estate). The above discussion reflects property yields that are
appropriate for the overall property cash flows. Obviously, a similar
analysis could be done for only the equity component of future cash
flows (i.e. NOI less debt service) – the resulting present value of
the equity would then be added to the mortgage amount to arrive at an
indicated property value.
Finally, support for cap rates is usually direct market evidence
from other sales and these market cap rates are not adjusted but
simply used to bracket or select an appropriate cap rate for the
subject property. Remember, next year’s NOI is usually used for the
subject and therefore should be used on the comparables.
Support for yield rates is usually from market indices such as
published yield rates on real estate from surveys of national lenders
or from investor interviews or from yield rates required from other
alternative investment options.