Discount Rate

A rate of return used to discount future cash flows back to their present value. Discount rate is calculated to account for the time value of money and as an indicator of the risk within an investment. It can act as a hurdle rate for investment decisions and make different types of investments comparable.

For example, in real estate, the discount rate is used to determine the current value of future cash flows from a property. It represents an investor's required rate of return on a real estate investment. It is also used as a key input in discounted cash flow analysis, which helps to determine a fair sale price for a property.

There are two ways to define the discount rate in real estate:

• The rate that is used to determine the present value of future cash flows.  
• The rate of return required by an investor to take the risk of purchasing a property.  

Either way, the resulting discount rate percentage can be used to determine the present value of a future stream of cash flows.