How To Select A Discount Rate For A Commercial Real Estate Investment
The discount rate is used to calculate the future value of the property by using the cash flow. We simply put the values, what is the expected rate of return of the property after a certain period of time, and calculate the Net Present Value of the property. You can use the discount calculator to determine the net present value of the property at the discounted rate.
The discount rate is used to establish the opportunity cost in purchasing a property, What is the expected profitability in purchasing a particular property? Does it also cover your risk of purchasing a particular property? Discount rate calculation is key in deciding, Are you going to purchase a property or not.
In this article, we are going to discuss the importance of selecting the discount rate of a property:
The benefit of using the discount rate calculation
When you are investing in a property and not determining, what would be the discount rate of the property, you are then investing blindly in a property. This investment can be fatal for working capital, as you are ignoring the inflation in the market, the risk involved in investing in a particular investment, and not even calculating the opportunity cost in your investment. You can use the discount calculator and advanced discount calculator to find out the exact discount rate of purchasing a particular property or an investment. The whole evaluation can only be done by finding the “Net Present Value of the Investment”. The NPV value is critical in deciding, how you are going to invest?
How to select a discount rate
Now the big question here, how to identify your discount rate, if you are running a small business and if you are CEO of an enterprise how you are going to select the discount rate, the general rule of thumb is to follow the general instructions:
The discount rate for small investors should be:
Discount rate= The investors required rate of return
The discount rate for institutional investors should be:
Discount rate= The weighted average cost of Capital(WACC)
Where WACC is the weighted average cost of all the sources used to purchase a property.
To find the discount rate you can use the discount calculator and online discount calculator, to exactly know what we have to invest and what rate of return you are going to get. This calculation is critical to find the opportunity cost of investment, What you are getting today by Investment? Will the Investment provide any benefit in the future?
Practical implementation of the discount rate
Now if we think of the practical implementation of the discount rate, you can say the discount rate is the expected rate of return or the Internal rate of return (IRR) on investment without any leverage. Your calculation should be perfect, a discount calculator by calculator-online can be perfect for making accurate calculations for your discount rate. This is important as you are going to invest in a particular property. If you are not calculating the discount rate perfectly, you can put the investment of the organization on the stake. If we calculate the cash-on-cash return the opportunity cost is 10 %, then we should try to use a discount rate of 10 %. The discount calculator can be great for making the perfect calculation of your investment.
Conclusion
The discount rate is the best calculation to determine, what is our actual rate of return on investment on a property. With this calculation, we would be able, whether to invest in property or not. The online discount calculator can be a great tool to calculate the exact calculation of your discount rate. This calculation is critical for your future investment and Internal rate of return.
