A discount rate is a percentage used in commercial real estate to determine the present value of future cash flows. It is sometimes referred to as the opportunity cost of capital or the needed rate of return on investment. As a measure of the projected rate of return on an investment after accounting for the risk involved, the discount rate is a key metric in financial analysis.
To determine the present value of future cash flows, an investor would use a discount rate of 10% if he or she is thinking about purchasing a property that is projected to earn $100,000 in yearly net operating income for the next 10 years, and the investor's necessary rate of return is 10%. Several variables are considered while determining the discount rate, such as the potential for loss, the rate of inflation, the cost of capital, and the worth of money over time. For determining the present value of future cash flows, a larger discount rate is typically used to investments with a higher level of inherent risk. A good commercial realtor can help you figure out your baseline discount rate and help you to project returns. Need help?