Overview
Real estate as an asset is very similar to a loan or bond, in that it generates a series of cash flows at fairly regular dates. For example, an apartment may charge a fixed rent every month.
This means that real estate can be modeled with the same sorts of tools that are used to value cash flows in fixed income, in particular, the tools of discounted cash flow analysis can be used.
The following considerations must be accounted for when doing a discounted cash flow analysis.
- Rent payments are not fixed. The owner has the ability to raise rents, and the real estate may go through periods where it is unoccupied.
- Real estate is an illiquid asset