Discount Rate v. Cap Rate

Both the discount rate and the capitalization rate are applied in the appraisal process.  It is important that the difference between these rates be understood so that they are not incorrectly applied.

 

Discount Rate: Rate used to convert a specified future income stream for a given period + sales proceeds into a present value. It is the equivalent of the yield rate or IRR.

 

Captialization Rate: Determined by dividing the property's NOI by its sales price.  This rate incorporates the anticipation of income increasing or decreasing and the appreciation / depreciation of the subject property.