Cash Flow is easy to calculate for property you already own.

It is the cash left over after you take the monthly income from the property and pay all of the monthly expenses of the property.

Cash Flow = Income - Expenses

## DISCOUNTED CASHFLOW

Discounted Cash Flow (DCF) is a calculation of the Present Value (PV) of future streams of cash flow, based on an interest rate used as a discount factor.

It is similar to the section on Present Value that determines the present value of real estate asserts with a known value in the future, but the Discounted Cash Flow calculation deals with a stream of periodic payments in the future, and determines what they are worth today.

Once you set up your calculations on this, keep a copy and use the same numbers the next time you do a workup.

Let's assume that you have projected a stream of payments that you expect will result from an investment property, like Cash Flow.

You have a multi-family property that is creating monthly Cash Flow of $2,400 and you want to know the present value of 24 months of such payments.

You have placed a time value on the use of money in your set of circumstances at 12%. In other words, you are willing to pay 12% for the use of other people's money because you know you can make a profit using that money in your business activities. Therefore, the Time Value of Money *for you* is 12%.

The monthly Interest rate factor of 12% annual interest is 1%.

First let's discount the value of the first 12 months of Cash Flow.

For the first month, the value is $2400 because you have the money in your hand now, assuming that you collect rents on the first day of the month.

But to determine the value today, the Present Value, of that $2,400 that you will not receive until a month from now, you discount it by the 1% interest rate that you have assigned as your time value of money.

Here is the Calculation:

PV = CF / (1 + I)

Present Value = Cash Flow amount / ( 1 + Interest Rate Factor that you have assigned to the time period)

For our discount of next month's rent:

Present Value - 2,400 / (1 + .01)

PV = 2,400 / 1.01

PV = 2,376.24

So, the Discounted Cash Flow value of the $2,400 that you will receive at the beginning of next month is $2,376.24 today.

To discount the Cash Flow for the third month, the calculation is slightly different.

Here is a video that helps explain it:

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