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.
Interested in Learning More About Investing?
If you are looking for a great place to learn about investing, landlording, wholesaling, flipping, or any other real estate related issue, you have to swing by and check out our real estate forums! Not only are they free, but we’ve got tons of real expert investors (not salespeople) who are not interested in taking your money, but want to help you learn. Our community is second to none!
Have a look around and join the conversation. We’ll see you there!