DCF vs Direct Capitalization: Two Ways to Value an Apartment Building
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There are two common ways to value an apartment building from its income. Direct capitalization divides one year of net operating income by a market cap rate: $600,000 ÷ 6.0% = $10,000,000. A discounted cash flow (DCF) projects NOI for each year of a holding period plus a sale price at the end, then discounts each amount back to today at the return a buyer requires. On the example below, a 10 year DCF at an 8.0% discount rate gives about $10,160,000, close to the direct capitalization value, because the two methods share similar assumptions. When they disagree, the gap tells you which assumption, growth or the exit cap rate, is doing the work.
This post is part of our guide to real estate syndication. It explains both methods with one example and shows when to use each. Figures are as of November 2026 and the example is illustrative.
Side by side
| Question | Direct capitalization | Discounted cash flow |
|---|---|---|
| Inputs | One year of NOI and a cap rate | NOI for each year, a sale price, a discount rate |
| Time horizon | One year | The whole hold, often 5 to 10 years |
| Captures growth? | Only through the cap rate | Explicitly, year by year |
| Best for | Stabilized buildings | Value-add, lease-up, changing income |
| Main risk | A wrong cap rate | Too many assumptions, especially exit and discount rates |
A worked example
A stabilized building has $600,000 of NOI. Comparable sales point to a 6.0% cap rate. The figures are an example.
Direct capitalization: $600,000 ÷ 6.0% = $10,000,000.
DCF: NOI grows 3% a year for 10 years. At the end of year 10 the building sells at a 6.5% cap rate on year-11 NOI, less 2% selling costs, for about $12,157,000. Each year's NOI and the sale are discounted to today:
| Discount rate | DCF value |
|---|---|
| 7.5% | $10,537,835 |
| 8.0% | $10,161,251 |
| 8.5% | $9,801,771 |
At an 8.0% discount rate, the DCF value is within about 2% of the direct capitalization value. A half-point change in the discount rate moves it by about $360,000 to $380,000. A lower exit cap rate or faster growth would raise it, and the reverse would lower it. That is the DCF's strength and its weakness: it shows each assumption, and each can be pushed.
When should you use which?
- Stabilized building, normal market: direct capitalization on tax-adjusted trailing NOI is the market's language. See what is a good cap rate.
- Value-add or lease-up: year-1 NOI does not describe the building you will own in year 3, so a DCF or a projection with explicit years fits better. See the value-add business plan.
- Checking a seller's price: run both. If the DCF only reaches the price with fast growth or a low exit cap rate, the price assumes them.
What drives a DCF?
- The exit cap rate. The sale is often half or more of the present value. See the exit cap rate assumption.
- The discount rate. The return a buyer requires for the risk; higher for riskier buildings or plans.
- Income growth. See rent growth assumptions.
- Capital spending. Subtract replacement reserves and planned projects from each year's cash flow. See syndication reserves.
A DCF is also where IRR comes from: the IRR is the discount rate at which the DCF value equals the price. See equity multiple, IRR and cash-on-cash and sensitivity analysis.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5 or more units from their friends and followers. The sponsor enters a few deal numbers and DoorRaise computes the projections on the deal page. DoorRaise forms the deal's LLC, prepares the offering documents, files Form D and verifies every investor's accreditation, in 506(b) and 506(c) deals. Investors fund by wire into escrow at Enterprise Bank & Trust. DoorRaise charges two flat fees: $1,500 to set up (non-refundable) and $5,000 a year for administration, the first year paid at closing from the money raised and only if the deal closes.
Check the direct capitalization side with the free cap rate and DSCR calculator, then start your deal.
FAQ
What is the direct capitalization method?
It values an income property by dividing one year of net operating income by a market capitalization rate.
What is a discounted cash flow valuation in real estate?
It projects the property's cash flow for each year of a holding period plus a sale price at the end, and discounts each amount to today at a required rate of return.
Which method do appraisers use for apartments?
Appraisers commonly consider the income approach with direct capitalization, and may also run a DCF, especially when income is expected to change. They reconcile the results.
Why do DCF and direct capitalization give different values?
Because their assumptions differ: the DCF's growth, exit cap rate and discount rate may imply a different value than one year of NOI at today's cap rate.
How is the discount rate related to IRR?
The IRR is the discount rate at which the DCF value equals the purchase price.
Sources
This article is general information, not legal, tax or investment advice. The example building and figures are illustrative. DoorRaise is not a lender, law firm, broker-dealer, investment adviser or funding portal.