Not a numbers guy so can someone simplify?

Question

I am trying to learn about annualized return, cap rate and gross yield percentages. I am not a numbers person so if someone could break this down on a simple level or direct me somewhere that could I would appreciate it.

Will Stewart · Answer

Thank you Greg. I have been looking at a website and they throw all these terms and numbers out and I have no idea what is relevant and what isn't. Your reply helped out a lot. Thanks again.

Greg Scott · Answer

Hopefully I can help simplify this.  For a newbie, you are trying to understand some more complex concepts.

I presume you are looking at single family.  If that is the case, one of the best metrics is cash-on-cash return.  That is simply the annual cash the property generates to your bank account divided by the amount of cash you needed to buy the property.  So, let's say your property generates $2,500 in cash flow and you put in $25,000 to cover down payment and other closing costs, that is a 10% cash-on-cash return.  You can do pretty well by focusing on just this one metric, if you stay away from low-end neighborhoods.   On paper they look like they have good cash-on-cash returns, but only if you can collect the cash.

For single family, the next best one would be Equity Capture.  Equity Capture is what it sounds like.  If you buy a property for $70,000 and put $20,000 in fixing it up and as soon as you are done the appraiser says it is now worth $100,000, you have $10,000 of Equity Capture.

If you can get good equity capture and cash-on-cash returns, you should be just fine.

As far as the other metrics, you can probably ignore them:

• Annualized Return will look at all the ways you can make money on real estate to give you an idea how much your investment is growing beyond just cash-on-cash.  When this is a historical analysis, it should tell you exactly what you made, including appreciation.  When it is a forecast, it is only as good as the assumptions used.  I've seen a lot of garbage in, garbage out forecasts.  
• Cap Rate - This should ONLY be used for commercial property because it is critical to pricing and obtaining a loan. For single family it is about as relevant as the average ranifall in that part of the city.
• Gross Yield - Frankly I never used this metric.