When you are purchasing a commercial property in a commercial real estate, you are investing a huge sum of money. For this investment to be risk-free, you need to calculate the discount rate of the property. The discount rate is a method to find the current value of the property by estimating the future cash flows. This is an important calculation for making a decision, we can use a discount calculator to find the NPV of a commercial property. When we find the Net Present Value and the Discount rate of the property, we can decide, which property we need to invest in and Why we have to invest? Based on realistic estimation.
Investors new to the real estate business find it difficult to decide on which factors, they decide about the discount rate of the property. There can be numerous factors for a property to calculate a discount rate and which rate should be applied to a certain property.
In this article, we are going to discuss, how we can select a discount rate for commercial property and which factors we have to consider:
The first thing when applying a discount rate on a property is considering the market in which the property is located, normally the properties in the primary markets, usually have a low premium rate as compared to the properties in the secondary and tertiary markets.
The main reason for that, the properties in the prime markets, usually have reached their peak market value, so it has less premium return as compared to the properties in secondary and tertiary market places, these commercial markets would prosper and the premium rate would apply higher in such markets. For applying the discount rate, you can use a discount calculator for getting the future cash flow at present.
Another important consideration is the direction of the market and the business. When you are certain the market will grow and especially the lease rate and property value would grow, then you can assume a lower level of risk involved in your investment and have to put a lower discount rate.
If you learn the business environment is going to decline, you have to account for a higher level of risk and a higher discount rate for the property. You can use an advanced discount calculator to find the exact value of the commercial property by putting the discount rate.
The treasury rates
The other consideration is the macro environment of the country, when you see the treasury rates are on the higher side, you also need to put the discount rate on the higher side and vice versa. For this, you can estimate the annual change of treasury rate in the last 10 years, for example, if the treasury rate is increasing at a rate of 3%.
You need to put in the 3% increase in the annual discount rate, to get the most perfect value of the Net Present Value(NPV) of your commercial property. You can use the online discount calculator, you can download various calculators from the discount calculator by calculator-online.
You need to consider various factors when applying a discount rate on a commercial property. The basic factors are the market condition, business environment, and treasury rate. These three factors provide you with the basic information, What kind of discount rate should be applied to your investment.October 18, 2021