Present Value

Present value is what a future payment is worth today, found by discounting it at a required rate of return. A cap rate is a shortcut for present value: dividing NOI by the cap rate gives the present value of a level income stream that continues indefinitely.

Discounted at 7%, $28,892 arriving a year from now is worth about $27,000 today. Summing that for every future year of an unchanging NOI gives $28,892 divided by 0.07, or about $412,700. That is the same figure as capitalizing at 7%.

When NOI is expected to grow, the math becomes value equals NOI divided by the discount rate minus growth. That is why the cap rate is often described as the required return minus expected growth, and why net present value and cap rate agree when the assumptions match.