What is the purpose of a leveraged discounted cash flow analysis?

A leveraged discounted cash flow analysis primarily serves to value the equity portion of a real estate asset's financial structure by accounting for the impact of debt financing on cash flows. In this analysis, future cash flows generated by the property are projected and discounted back to present value, taking into consideration the cash flows available to equity holders after debt obligations have been met.

This approach enables investors to assess the profitability of their equity investment and determine whether it meets their desired return thresholds. By incorporating leverage, the analysis reflects how debt can amplify the returns on equity, which is critical in making informed investment decisions.

The focus on the equity portion differentiates it from other analyses that might emphasize the debt aspect or the overall return or risk. While risk and overall return are important considerations in real estate investment, they do not pinpoint the specific valuation of the equity position that the leveraged discounted cash flow analysis aims to achieve. Thus, valuing the equity portion is the primary purpose of this analytical approach.