Direct Cap vs. DCF: What Changes the Answer Most?

4 Star Mid-Rise Apartments

Introduction

In commercial real estate, two common valuation tools – Direct Capitalization and Discounted Cash Flow (DCF) – often arrive at different price estimates for the same asset. Why do these methods sometimes diverge, and which factors change the answer most? To explore this, imagine valuing a stabilized U.S. office building. A lender might quickly capitalize its current net operating income (NOI) for a direct cap value, while an equity investor might build a multi-year DCF model with forecasts and a resale. In theory, if all assumptions align, both methods should yield similar resultsappraisersforum.comtrerc.tamu.edu. In practice, however, lease structure, growth assumptions, exit cap rate, and timing can pull the two valuations apart. In this narrative, we break down each of these variables – explaining how they influence valuation divergence, what industry professionals consider, and why lenders and investors sometimes see things differently.

Lease Structure: Stability vs. Rollover Risk

Lease structure is a major swing factor in direct cap vs. DCF valuations. Direct capitalization assumes a steady perpetuity of income – essentially “what you see is what you get” based on today’s stabilized NOI. This works well when leases are long-term and staggered such that the income stream is smooth and predictable. For a fully leased building with no near-term tenant turnovers, a simple cap rate applied to current NOI can closely mirror a detailed DCF (because there are no surprises hidden in the cash flow)

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However, when a property’s lease structure is complex or unstable, direct cap can gloss over critical details. DCF analysis allows underwriters to model each lease expiration, renewal, or vacancy period year by year. For instance, consider an office building where 50% of the space – perhaps an anchor tenant – comes up for renewal in year 3. In a DCF model, you would explicitly forecast the “hiccup” in cash flow: potential downtime, tenant improvement costs, leasing commissions, or rent adjustments. The result could be a noticeable dip in projected NOI during that period, dragging down the DCF valuation. By contrast, a direct cap approach might still be looking at today’s full NOI as if it continues uninterrupted, unless the appraiser makes an explicit adjustment. As one seasoned appraiser notes, “Hiccups in cash flow that would be apparent in a DCF can cause the two to diverge… (i.e. large quantities of leases coming due at the same time in a soft market)”. In other words, heavy lease rollovers or short lease terms can make a property’s true value lower than a static cap-rate valuation suggests.

Industry considerations: In practice, appraisers and lenders recognize significant lease rollover risk and may adjust the cap rate upward (or the NOI downward) in a direct cap valuation to reflect it. For example, if a major lease expiry looms, a higher cap rate can be used to account for the uncertainty, effectively lowering the direct cap value. Still, these adjustments are blunt. Many professionals prefer DCF in such cases because it captures lease-by-lease details – you can input specific vacancy durations, market leasing assumptions, and re-tenanting costs to see their impact. Notably, many investors insist on DCF for multi-tenant properties with varying lease expirations, whereas lenders (and appraisers for lending purposes) might lean on direct cap if the leases are long-term or if they require a quick “as-is” valuation. Lenders often care most about current income stability to ensure debt service coverage, so they might focus on the in-place NOI and apply a conservative cap rate. Equity investors, on the other hand, look at the forward cash flow story – if half the building could go dark in three years, their DCF (and their bid price) will reflect that reality.

Practical teardown: Imagine two identical buildings, except Building A has tenants locked in for 10 years, while Building B has a major tenant lease expiring next year. At a glance via direct cap, both might seem equally valuable today if they’re producing the same NOI – after all, each has (say) $1 million NOI and trades at a 6% cap (implying ~$16.7 million value). But a DCF tells a more nuanced story. For Building B, the analyst will model year 2 with half the rent gone, a period of free rent and TI costs, and a gradual lease-up – all of which sharply reduce the present value of its cash flows. The DCF value for Building B could easily come in much lower than Building A’s, even though a naive cap-rate approach valued them the same. This is why properties with short or staggered leases are typically valued with DCF: the method shines a light on lease structure nuances that direct cap’s single-year snapshot might miss. In summary, the more complex the lease profile, the more the DCF approach is favored – it makes the invisible visible, while direct cap requires you to assume the invisible isn’t too scary.

Growth Assumptions: Flat vs. Rising NOI

Another key variable is income growth (or decline). Direct capitalization inherently assumes a steady state or an implicit average growth baked into the cap rate. In other words, the market cap rate used in direct capitalization reflects investor expectations of future growth (or lack thereof) in a broad sense. If the market expects income to grow ~2% per year on average, cap rates will adjust accordingly (similar to how bond yields reflect expected inflation). However, for any given property, actual NOI growth assumptions might differ from the market norm – and that’s where direct cap and DCF can diverge.

DCF modeling lets us explicitly project growth (or contraction) in income and expenses each year. If you believe rents will rise 3% annually, you can build that in. If you expect a dip and then recovery, you can model that pattern. Direct cap, by contrast, is typically based on the next twelve months of NOI (stabilized) capitalized into perpetuity. It doesn’t explicitly show the growth, aside from the choice of cap rate. So if a property’s NOI is poised to climb sharply, a single-year cap rate valuation might undervalue it (because it’s only looking at the current NOI and not the higher future cash flows). Conversely, if a property has no growth or declining NOI, the direct cap method might overvalue it relative to a DCF that forecasts stagnation or erosion over time.

A simple illustration: suppose an investor expects that a certain retail center’s rental income will grow by 3% per year. Using DCF, they’ll show year-by-year increases in NOI and likely get a higher valuation than the direct cap today. In fact, there’s a well-known relationship (the Gordon growth model) that links cap rates, discount rates, and growth. In a perfect world, the discount rate in a DCF equals the cap rate plus the growth rate. For example, if investors require a 10% total return and expect 2% annual NOI growth, the going-in cap rate might be around 8%. In such a scenario, a DCF with 2% growth and a 10% discount rate should theoretically produce the same value as direct cap with an 8% cap. But in the real world, assumptions aren’t so neat. Growth can be uncertain or uneven, and investors might layer additional risk premiums.

Industry considerations: Market participants often “price in” growth implicitly – for instance, prime assets in high-growth markets trade at low cap rates because buyers accept a lower initial yield, banking on future NOI increases. However, prudent analysts will test those growth assumptions explicitly in a DCF. For a lender, growth projections are usually conservative or even flat in underwriting. Lenders don’t want optimistic rent growth propping up a valuation that their loan depends on. An investment manager, by contrast, might underwrite rent bumps or operational improvements to justify paying a higher price – but will also demand a suitable discount rate (higher required return) for riskier growth. Notably, DCF analysis allows scenario testing: What if rents only grow 1%? What if expenses grow faster than revenue? You can see the impact on value and returns. Direct cap provides no such transparency – it’s a single-point estimate. Therefore, when growth assumptions differ from status quo, DCF tends to be the method that captures those nuances. For example, in a booming submarket an investor might project significant NOI growth and find the DCF valuation exceeds the simple cap rate valuation (since direct cap might be “understating” future upside). On the flip side, if a property has in-place rents above market and likely to roll down (negative growth), a DCF will show a lower value than a naive cap rate on current NOI – a critical insight for a lender to avoid over-lending on temporary income.

Practical teardown: Let’s put numbers to it. Say a property’s current NOI is $1,000,000. Using a 6% cap rate, direct cap suggests ~$16.7 million value. Now assume we expect that NOI will grow 3% per year due to rising rents. If we perform a 10-year DCF, growing NOI at 3% annually, and assume a discount rate (required return) of 8%, the present value comes out notably higher than if we assumed no growth. In fact, our DCF might inch closer to $17 million in value in that growth scenario, compared to around $15 million if we had assumed flat NOI (illustrative figures). The gap illustrates how sensitive valuations are to growth. Direct cap didn’t change – it was anchored on year-one income – but the DCF did change because we altered the growth trajectory. Bottom line: when growth expectations depart from the norm, they “change the answer” in valuation significantly, and DCF is the tool to gauge that impact explicitly. Direct cap is best when growth is minimal or simply in line with market averages; any deviation, and the one-year snapshot can mislead.

Exit Cap Rate: Future Market Sentiment

One area where DCF bakes in a big assumption (and direct cap does not) is the exit cap rate. In a DCF, after projecting cash flows for a hold period (say 5 or 10 years), we need a terminal value – an expected sale price at the end of our holding period. This is often done by applying an exit capitalization rate to the forecasted NOI at sale. For example, if we plan to sell in year 5 and project the NOI in year 6 would be $1.1 million, and we assume an exit cap of 7%, the terminal value is $1.1M / 0.07 ≈ $15.7 million. This reversion is then discounted back to present along with the interim cash flows. Direct cap, by contrast, assumes an indefinite stream of income – effectively, it’s valuing the asset as if you hold it forever (or as if market conditions today persist indefinitely). There is no separate “exit” assumption in a direct cap; the current cap rate is applied to current NOI and that’s that. The divergence appears when your expectation of future market cap rates differs from today’s cap rate.

In many cases, analysts assume the exit cap rate will be higher (i.e. a less aggressive valuation multiple) than the entry cap rate. Why? Because of uncertainty and the aging of the property – a bit of risk premium for the future. A common guideline is to add ~10 basis points to the cap rate per year of the hold. So a property bought at a 6% cap might be sold at 6.5% in five years, for instance. This seemingly small change can have a big impact on value. All else equal, a higher exit cap reduces the terminal value and thus the DCF valuation. Meanwhile, the direct cap method (using the going-in 6%) wouldn’t reflect that softer exit pricing. On the other hand, if one believed cap rates will compress or remain low (say you expect to sell at 5.5% in the future), the DCF would show a higher value than current direct cap – though most practitioners err on the side of caution and assume either stable or rising cap rates over time.

Industry considerations: The exit cap assumption is often one of the largest sensitivities in a DCF model. Because the terminal value can account for a large portion of the total present value (often 60–80% of the asset’s value comes from the reversion in a DCF), getting the exit cap right is critical. Investors will typically perform sensitivity analysis: What if exit cap is 0.5% higher or lower? This scenario testing is essential because small shifts in cap rates can swing values by millions. Direct capitalization, in contrast, implicitly assumes the current cap environment persists. It doesn’t ask you to make an explicit call on future market conditions. That makes direct cap simpler, but potentially naive in a volatile market. For example, in a period of rising interest rates and softer investor demand (sound familiar in recent years?), cap rates tend to increase – meaning future values could be lower. A lender might want to ensure a borrower isn’t over-leveraging based on today’s lofty values if in five years the property might be worth less at refinance or sale. Thus, lenders and appraisers often favor conservative exit cap assumptions as a check. It’s not uncommon in appraisal reports to see both a direct cap valuation and a DCF with an exit cap a bit higher; if the DCF comes out lower, that might signal caution.

From the investor perspective, exit cap is about strategy and market outlook. A value-add investor planning a short hold might place heavy emphasis on the exit cap because they know a huge chunk of their profit comes from reselling the asset. A core investor with a long-term hold might be less focused on exit cap and more on steady cash flow (closer to a perpetuity view). This difference in mindset means equity investors often sweat over every 25 bps of terminal cap rate in their DCF, whereas a lender primarily cares that even under a higher exit cap, the loan-to-value remains safe. The direct cap method, lacking an explicit terminal assumption, might be fine for that lender when combined with other approaches (like comparable sales). But an investor deciding whether to buy will definitely run a DCF to test different resale scenarios.

Practical teardown: Let’s revisit our hypothetical $1 million NOI building valued at ~$16.7M via direct cap at 6%. If our investor plans to hold 5 years, they might project an exit cap of, say, 6.5%. Using a DCF, they find the present value might only be ~$14–15 million (assuming an 8% discount rate, as an example) – notably lower than the direct cap valuation. The difference was driven largely by the assumed softening in exit pricing and the effect of discounting over 5 years. If instead they assumed an exit cap of 6% (no change) and modest NOI growth, the DCF value could come out closer to ~$17 million, roughly aligning with the direct cap. The lesson is clear: change the exit cap, and you often change the answer dramatically. It’s a lever that can dwarf the impact of a few years of rent fluctuations. Therefore, understanding and justifying the exit cap assumption is a big part of any DCF-based valuation. Investors will cite market trends, interest rate forecasts, and asset-specific factors to set the exit cap, whereas direct cap simply reflects today’s market sentiment. Neither is “right” or “wrong” universally, but if you expect tomorrow’s market to differ from today’s, the DCF’s explicit terminal cap lets you incorporate that vision.

Timing and Holding Period: The Influence of Time Horizon

Timing matters in valuation in several respects. First, there’s the timing of cash flows – when income is received or lost. Second, there’s the holding period or horizon chosen for analysis. Direct capitalization is essentially a snapshot as of today, capitalizing one year’s income into perpetuity (an implicit infinite horizon). DCF, on the other hand, models a finite period of cash flows (often 5 or 10 years) and an exit at that horizon. The choice of horizon and the distribution of cash flows over time can lead to valuation differences.

Consider a property that is identical in two scenarios except for when a certain cash flow event happens. Perhaps there’s an expected rent increase of $200,000 annually, but in Scenario X it happens next year, while in Scenario Y it happens five years from now. A direct cap might just see the average stabilized NOI and not discern the difference in timing – especially if an appraiser uses a forward-looking stabilized NOI that already incorporates that future bump. But a DCF will show that a rent increase in Year 1 adds a lot more value (minimal discounting) than the same increase deferred to Year 5 (heavily discounted). Timing nuances like these mean DCF is better at capturing the present value impact of when cash flows occur. If most of a deal’s upside is back-loaded, direct cap might overestimate its value if it doesn’t account for the delay. Conversely, if a property has front-loaded incentives (like a big free rent period now, with normal rents later), a current NOI might be temporarily low and direct cap could undervalue the property – whereas a DCF could model the bump after free rent burns off, showing a higher value than the “current cap rate” implies.

The holding period chosen (5-year DCF vs. 10-year DCF, etc.) can also influence results. In theory, if you extend the DCF long enough, it should converge toward the perpetuity value (direct cap) as you capture more of the cash flow stream. But in practice, most DCFs stop at a finite year and punt the remaining value into the terminal value. The shorter the holding period, the more weight on the exit value relative to income. A 5-year DCF might derive, say, 70% of the present value from the year-5 sale, whereas a 10-year DCF might derive only 50-60% from the sale (because you’ve collected more cash flow in the interim). Different analysts might pick different horizons, and although a well-calibrated DCF should yield similar present values regardless (if assumptions are consistent), in practice shorter-horizon analyses might be more sensitive to exit cap assumptions (since the exit is a larger component sooner) while longer horizons spread the value out.

Investor vs. lender perspective: This is one area where goals diverge. Investors often think in terms of a target hold (e.g., a fund has a 5-7 year life), so they craft DCFs around that period and plan an exit. The timing of their cash flows (annual yields and eventual sale) directly affects their IRR. Lenders, in contrast, may care more about the loan term (say a 10-year loan) and whether the property can refinance or pay off at maturity. A lender might look at a 10-year timeline by necessity (to ensure the property’s value and income in Year 10 can support takeout financing). Meanwhile, a bridge lender might look at just 2-3 years. The direct cap method gives a today value but doesn’t tell you much about what happens by year 5 or 10. So lenders often look at DCF or at least scenario analyses to ensure that timing issues (like a big capital expense in year 4, or a dip in occupancy in year 6) won’t jeopardize their loan. That said, lenders ultimately lend on the lesser of cost or appraised value, and those appraisals use both methods. If a direct cap appraisal value comes in significantly higher than a DCF appraisal value, a cautious lender will likely take the lower number or investigate why. It could be because of timing factors: maybe the DCF revealed that the “stabilized NOI” used in direct cap won’t actually be realized until three years from now – essentially a timing mismatch.

Practical teardown: Timing can be abstract, so let’s ground it. Suppose our hypothetical property is stable, and an appraiser does both a direct cap and a DCF. If the property is fully stabilized today, the timing of cash flows is uniform and the DCF (whether 5 or 10 years) might closely match the direct cap value, as long as they use a consistent discount rate/yield. (In fact, a series of equal cash flows over time with a sale at the same cap rate will mathematically equal the direct cap value.) Now introduce a timing wrinkle: the owner plans to invest in renovations during years 1-2, during which NOI dips and then rises by year 4. A 5-year DCF will show the early dip and partial recovery, and a big chunk of value coming from selling in year 5 post-recovery. An immediate direct cap on current NOI (which is temporarily low during renovation) could undervalue the asset, whereas a direct cap on projected stabilized NOI (year 4) without discounting might overvalue it relative to present dollars. The DCF properly discounts the interim weak cash flow and the later stronger cash flow to today. Thus, when cash flows are unevenly distributed over time, it “changes the answer” by rewarding or penalizing value depending on whether cash comes sooner or later. Timing also encompasses the period of analysis – for instance, evaluating an apartment with a 30-year DCF versus just using a cap rate. If you believe long-term trends (beyond year 10) will significantly affect value (say, neighborhood decline or growth after a transit project completes in 15 years), a simple cap rate today may miss that, whereas a longer DCF horizon could capture the effect. On the flip side, extending a forecast too far introduces more uncertainty.

In summary, timing influences divergence primarily when cash flows are not level. DCF accounts for exactly when each dollar arrives; direct cap assumes a smooth and perpetual timing. Real-world cash flows are rarely perfectly smooth – leases expire, markets cycle, improvements happen – so time matters. Direct cap is essentially a snapshot of now (or a normalized “now”), whereas DCF is a movie reel of the next several years. Sometimes the snapshot and the movie tell the same story, but when they don’t, timing is often the reason.

Sample Calculation: Bridging the Gap with Numbers

To crystallize how these variables can change valuation, let’s walk through a simplified example. Imagine a stabilized office property with current NOI = $1,000,000. Market cap rates for similar assets are around 6%.

• Direct Capitalization Approach: Using direct cap, we divide the NOI by the cap rate.- Value = $1,000,000 / 0.06 = $16.7 million (approximately).This assumes the property’s current income and market conditions represent a steady state. It’s a one-step snapshot valuation.

• DCF Approach (Base Scenario): Now let’s value the same property using a 10-year DCF. We’ll assume no income growth for simplicity – NOI stays $1,000,000 each year – and assume the investor plans to sell at the end of Year 10. We need a discount rate (let’s say the investor’s required return is 8%) and an exit cap rate. Given some uncertainty over a decade, the investor assumes an exit cap of 6.5% (slightly higher than today’s 6% to be conservative, reflecting a softer future market). The Year 11 NOI (for sale) would still be $1,000,000 in this no-growth scenario, and at a 6.5% exit cap the terminal sale price is $1,000,000 / 0.065 ≈ $15.4 million. Now, discount all cash flows (10 years of $1M, and $15.4M sale at the end) back at 8%. The result is a present value of around $14.5–15 million. This is notably lower than the $16.7M from direct cap. Why? Because in the DCF we: (a) discounted the annual income at a rate higher than the cap (8% vs 6%), and (b) assumed a slightly lower multiple on exit (higher cap rate at sale) – both of which reduce value. This reflects an investor’s risk-return requirements and an expectation that the market might not be as frothy in the future.

• DCF with Growth: Now say the property is in a growing market – you expect NOI to rise by 2% per year through rent increases. If we build 2% annual growth into the 10-year DCF (and keep the 8% discount and 6.5% exit cap), the projected Year 11 NOI becomes about $1,218,000 (after compounding growth). The terminal value at 6.5% cap would be higher, around $18.7 million. Discounting the increasing cash flows and that higher sale, the present value might come out around $16-17 million. Suddenly the DCF valuation is much closer to (even slightly above) the direct cap value. The added growth essentially boosted future cash flows enough to bridge the gap that existed when we had flat NOI. This illustrates how growth assumptions can swing the DCF result significantly – a key reason investors love DCF for parsing different scenarios. A direct cap using year-one NOI didn’t reflect this growth, but an investor paying $17M would argue they’re not overpaying – they’re pricing in the future rent increases. Whether a lender agrees is another story (a lender might still value it closer to $15M conservative value, lending say 60% of that, to be safe).

• DCF with a Lease Shock: Finally, let’s introduce a lease-structure twist – suppose a big tenant occupying 30% of the building will vacate in Year 3 (with no renewal). During re-leasing, the NOI in Year 3 and 4 will drop. We update our DCF: perhaps Year 3 NOI falls to $700,000, Year 4 rebounds to $900,000, and by Year 5 back to $1,000,000 (stabilized again, perhaps even growing thereafter). We also assume some reletting costs that further reduce cash flow in those years. When we recompute the DCF with these lumpy cash flows, the present value could sink considerably – let’s say it comes out around $13-14 million. The direct cap method, if someone naively still used the current $1,000,000 NOI and 6% cap, would still say $16.7M (ignoring the impending vacancy). In reality, any savvy buyer or lender wouldn’t ignore it – they’d adjust value down. But how they adjust it varies. An appraiser might choose a higher cap rate or deduct a lease-up reserve, which might implicitly knock the value down closer to where the DCF lands. The DCF, though, gave a clear roadmap: it showed the year-by-year impact and yielded a lower NPV because a chunk of the income stream goes temporarily missing. This shows how combining factors (timing of a vacancy, lease structure, and growth resumption after) all interplay in a DCF. It’s a more granular picture than direct cap can offer.

In this example, we saw the direct cap value stay at $16.7M throughout, while the DCF value ranged from around $14M to $17M as we changed growth, exit, and lease timing assumptions. What changed the answer most? It depends on the scenario: the lease vacancy had a big negative impact; adding growth had a big positive impact; the exit cap assumption made a notable difference as well. The point is that DCF allowed us to tweak each factor and see the effect in dollar terms. Direct cap would only change if we manually adjusted the cap rate or NOI input in response to those factors – essentially trying to force the single-year model to reflect multi-year realities.

Conclusion: Marrying the Methods and Perspectives

Direct capitalization and DCF are not enemies – they are two sides of the same coin, and each has its place in a real estate professional’s toolkit. When a property is simple, stable, and “what you see is what you get,” the direct cap method provides a quick and reasonable valuation. It’s intuitive (how much for a dollar of current NOI) and grounded in market yields. Lenders appreciate its simplicity and the fact that it aligns with how many appraisers and brokers talk about values (“this trades at a 6 cap”). However, the minute a deal has hairs on it – lease rollover risk, anticipated growth, planned renovations, an uncertain future climate – the DCF method becomes invaluable. It makes explicit every assumption: rent growth, vacancy periods, exit pricing, discount rate for risk, timing of cash flows. In doing so, it often reveals differences that a direct cap glosses over.

For investors, DCF is almost second nature, because it mirrors how they think about returns over time. Equity investors must consider not just the going-in yield but the total return, which includes what happens over a multi-year hold and eventual sale. Thus, they care deeply about those variables that “change the answer”: Will rents grow? What cap rate can we exit at? When will we face downtime? They will adjust their offer price until their DCF-derived return meets their targets. For lenders, the concern is downside and loan repayment. They often use direct cap (and other metrics like debt service coverage) to ensure the property’s current income comfortably covers the debt. But they also quietly employ DCF thinking when assessing risk – for example, “What happens in five years when this loan matures? Will the value hold up if cap rates rise by 1%?” A lender might not run a full DCF model like an investor, but they are certainly sensitive to the same factors: lease stability, future market conditions, and growth projections. In fact, many lenders’ credit committees will ask for stress tests that are essentially simplified DCF scenarios (e.g., assume zero rent growth and a higher exit cap – what’s the value and LTV?).

Ultimately, the two methods should converge if applied correctly. As appraisers like to say, DCF simply makes explicit what direct cap keeps implicit. If you have all the same assumptions, you’ll get nearly the same answer. In a stable scenario, a DCF is often used as a “check” on the cap rate value (and vice versa). Large discrepancies mean you’ve likely uncovered something: maybe the cap rate derived from market sales assumes more growth than you realized, or maybe your DCF is too optimistic/pessimistic about the future. By understanding lease structures, growth, exit caps, and timing, one can reconcile the two approaches.

To answer the question of what changes the answer most, consider this rule of thumb: Anything that deviates from a flat, perpetual cash flow will tend to widen the gap between direct cap and DCF. Major lease events (vacancies, renewals) introduce non-perpetual patterns – DCF captures them, direct cap must adjust or risk misvaluation. Aggressive growth or decline breaks the “flat line” assumption – DCF will show the compounding effect, direct cap will lag unless the cap rate is tweaked. Changes in capitalization environment over time (exit cap) break the notion that today’s market is the same as tomorrow’s – only DCF explicitly accounts for that by design. And the time horizon emphasizes how much weight is on near-term income versus future resale – DCF gives you flexibility to tailor that to your use-case, whereas direct cap effectively assumes you’re in it forever (or that the market has perfectly figured out the future).

In practice, seasoned professionals use both methods in tandem. They’ll do a direct cap for a quick reality check and a DCF for a deep dive. If the numbers are close, it’s reassuring (the property is straightforward). If not, it’s a signal to dig into those assumptions. For a commercial real estate lender or an equity investor in the U.S., the takeaway is clear: know which levers move your valuation. Lease structure, growth, exit cap, timing – these are the big four. By breaking down each one, as we did here, you can better understand not only what a property is worth, but why two different analyses give two different answers. And armed with that insight, you can make more informed lending and investment decisions, striking the right balance between the simplicity of a cap rate and the clarity of a cash flow forecast.

October 14, 2025, by a collective authors of MMCG Invest, multi family study consultants.

Sources:

• Direct cap vs. DCF usage and differences;

• Effects of lease rollover on valuations; handling of growth in valuations;

• Exit cap assumptions and impact;

• General relationship between cap rates, discount rates, and growth