This is the most suitable methodology for evaluating a real estate investment because it takes into account the timing of both the incoming cash flows (revenues) and the out-going cash flows (expenses).
In the case of property investments that are expected to be held for more than 6-12 months, which is usually the case, the correct evaluation of property investment feasibility requires the use of prudent projections of property income and expenses. This means that the investor or his/her advisors should carefully examine current levels of revenues and expenses and assess carefully whether they will remain stable, increase, or decrease in the months and years ahead. It is these projections that need to be used in estimating the future revenues and expenses that will be entered into the multi-period cash flow model.
Given that any projection has an element of uncertainty, it is advisable to examine property investment feasibility under alternative base-case and pessimistic scenarios, in order to assess the risk of possible losss if things turn out worse than predicted.
