What’s the difference between ROI and CAP Rate?

by | BiggerPockets.com

One of our newer forum members recently asked:

“What’s the difference between ROI and CAP Rate?”

Thanks to one of our resident experts, Ryan Webber, he got a perfect answer:

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.

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About Author

Joshua Dorkin

Joshua Dorkin is a serial entrepreneur, investor, podcaster, publisher, educator, and co-author of How to Invest in Real Estate. He started BiggerPockets to help democratize the real estate investing landscape for himself and others, aiming to make it accessible for everyone, regardless of income or education. Today, BiggerPockets is the premier real estate investing website online with over one million members and reaching over 70 million people with the message of financial freedom through real estate investing. Joshua, along with his wife and three daughters, make their home in Denver, Colorado, and spend any time they can traveling, exploring, and adventuring. Read more about Joshua’s story in 5280 and Inc.com.


  1. Great Post. Next up: Discounted Cash Flows. Cap rates are a must know before you start to value a property using the discounted cash flows method. Great explanation though on the ROI vs. Cap Rate question.

  2. Why would you ever use CAP over ROI?

    When I see a property, I want to know all of the expenses compared to profits so I can get a realistic expectation of what will happen to my investment.

    CAP rates seem like they are better for those trying to sell a property.

  3. Funny, I was thinking why would you ever use return on investment instead of cap rate? The rate at which you borrow is variable. All that is needed to know is the cap rate to know if it’s a good investment. If the cap rate is 10%, then as long as your mortgage rate is below that you will be positive (assuming interest only payments). If principle and interest are paid, then your equity break even point will be a cap rate equal to the mortgage rate.

    • J. P. Morgan

      However, presuming you ever dispose of the parcel, would would need to know what the growth (+/-) rate is, in addition to inflation. Alternatively you could jump to a conclusion on the net sales price, without doing either you cannot compare it to another investment. The cap rate gives you a good comp, presuming similar property types, risk profile, geo, when you purchase, but this does not address whether or not it is a good investment by comparison to other properties or other non-real estate investments. Please advise, if this is not correct.

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