What Exactly is a Discount Rate (in Real Estate)?
In a hurry:
Apply it today:
Discount Rate = Required Rate of Return; what you want to earn on your investment, annually, as a %
Higher the discount rate, the lower the value (and vice versa)
More art than science; you decide what the rate is based 1) your interpretation of risk and 2) what's happening in the market at that time
By the end of this episode you’ll learn:
What is a Discount Rate?
How do you estimate a discount rate?
How is it applied in CRE?
Have a few minutes:
For many, answering the question, “What is a Discount Rate?” is much like answering the question “What is the meaning of life?”. It is met with confusion, awe and sometimes even heartburn.
The Discount Rate holds a special place in commercial real estate, serving as the cornerstone for valuation and investment decision making. Appraisers use it to estimate value. Banks rely on it to (in part) set loan proceeds. Investors and developers use it as a benchmark for performance and to help determine offer prices.
Understanding what the Discount Rate is and how it is applied sets seasoned commercial real estate professionals apart from the novices.
In this episode we define Discount Rate (in every-day language), outline the most popular ways to estimate a Discount Rate (in and outside of the classroom) and illustrate practical examples and applications.