Newb: ROI vs CAP Rate

Whats the difference between ROI and CAP Rate.
I know that cap rate doesnt take into account the financing.
So how does the ROI account for financing.
The Property Analysis Tool gave me a 108% ROR aka ROI for a property i'm looking at and a CAP rate of 6.17, help me to understand this.
As well as the break down of ROR on appreciation and BTCF. Thanks!

Edited: 06/26/2010 at 03:35AM

Ryan Webber

Wholesaler · Amarillo, Texas

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Icon_minipost May 15 '07, 11:43 AM

ROI is your return on investment factoring in your financing. Its your annual cash flow after all expenses divided by your initial investment (out of pocket expense). ROI depicts the true percentage that you will make on your money in the first year. Capitalization rate (cap rate) is your ROI if you paid cash for the property. It doesn't include financing. It is a better way to compare apples to apples and take financing differences out of the picture. Cap rate is factored by taking your annual Net Operating Income (NOI), which is your gross income minus all expenses except debt service (principal and interest mortgage payment), and dividing that by the purchase price of the house.

Again, Cap Rate is the percentage you would make on your money if you paid cash for the property, and ROI is what your actual percentage is when you factor financing into it.

Your BTCF is just your cash flow before you pay income taxes (Before Tax Cash Flow).

Edited: 06/26/2010 at 03:35AM

Michael Rossi

Real Estate Investor · Ohio

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Icon_minipost May 15 '07, 05:50 PM

kamleshg,

You've got to be very careful with property analysis tools because they work on the GIGO principle (Garbage In, Garbage Out). Properties with a 6.17% cap rate will NOT cash flow unless you're putting a high percentage of money down.

Why not post the purchase price and gross rents of the deal you're looking at and we'll analyze it for you?

Mike

Edited: 06/26/2010 at 03:35AM

Kamlesh G.

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Icon_minipost May 15 '07, 06:48 PM

Thanks Mike that helps allot. Totally understandable now!
So basically ROI is equivalent to CashOnCashReturn?

As far as property in question, its a condo selling at $98k, with a market rent of $800's. Looking at 5%down@7%ARP, and a killer $250/month HOA fee. Let me know your thoughts.... THANKS!

Edited: 06/26/2010 at 03:35AM

Michael Rossi

Real Estate Investor · Ohio

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Icon_minipost May 15 '07, 06:56 PM

kamleshg,

THAT'S EASY. This is a big loser. I'd RUN, not walk, but RUN away from this " deal" .

Mike

Edited: 06/26/2010 at 03:35AM

Kamlesh G.

19 posts
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Icon_minipost May 15 '07, 07:00 PM

Yeah I thought the same, just needed some confirmation.
Just to get an idea, what calculations did you do to determine that it was a bad deal?

Edited: 06/26/2010 at 03:35AM

Michael Rossi

Real Estate Investor · Ohio

4587 posts
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Icon_minipost May 16 '07, 03:26 AM

kamleshg,

I could tell that this was a terrible deal because the gross rents were not even 1% of the cost of the property (purchase price + rehab). Normally, the gross rents will need to approach 2% of the cost to cash flow properly.

Mike

Edited: 06/26/2010 at 03:35AM