What is the method called that converts future income to present value?

The method that converts future income to present value is known as the capitalization rate, or cap rate. This financial metric is crucial in real estate valuation because it provides a simple way to assess the potential return on investment for a property.

The cap rate is calculated by taking the net operating income (NOI) of a property and dividing it by the current market value (or purchase price) of the property. This ratio effectively helps investors understand how much income they can expect to generate from an investment in relation to the price they will pay. By using the cap rate in this way, investors can make informed decisions about whether a property is a good investment based on future income prospects compared to current market evaluation.

The other choices relate to different aspects of property management and real estate valuation. Net operating income focuses on the income generated from a property after deducting operating expenses, while market value relates to the price at which a property would sell in the current market. The gross rent multiplier is another valuation tool but specifically measures the relationship between the price of an investment property and its gross rental income, without directly converting future income into present value. Thus, cap rate is the most accurate term for converting future income to present value in the context of real estate investment