Direct capitalization, IRR, and NPV

Capitalization rate

Approach				Stable NOI	Erratic net operating income(*1)
IRR					No (*3)
Direct capitalization				Yes (*4)
NPV					OK (*2)

(*1) (e.g.) A real estate generated several years of positive cash flows followed by negative cash flows, and then a return to a positive cash flow.

(*2) If a real estate property's cash flow fluctuates, the best valuation approach is the net present value (NPV).

(*3) IRR has a number of limitations, including multiple solutions when the investment has positive cash flow one year and a negative cash flow the next year.

(*4) The direct capitalization approach is best used when the investment's net operating income is stable.