"Breakeven" Cash Flow
Suppose the investor's capital investment is not zero. That is, he makes a positive down payment of some reasonable amount. Why would one invest capital if the operational results of ownership merely "breaks even"? It would seem the investor makes no money. The only reasonable answer is that the investor believes there will be some other reward. That reward is appreciation in value (we deal later with whether that apprecation is accompanied by or the result of increased future income).
Under the right assumptions, the valuation equation for real estate may be decomposed into,
where d is the discount rate applied to future cash flows to determine net present value and g is a growth rate at which future cash flows increase year to year. This equation explicitly considers the buyer's expectation that income will rise over time. As such the second version of the equation incorporates the buyer's motivation to accept a zero cash flow (breakeven) acquisition.
