@Tony Wallis Cap rate really only comes into play for big multifamily. The important number is cash on cash. cap rate is net operating income divided by sales price'. example $20kNOI/$200k = 10 cap. Using the same NOI you put $20k down your cash on cash is 100%. If you put $10k down yout cash on cash is 200%. The first cash on cash means you get all the money you invested in the deal back in a year. The second would be 6 months,
- CoC (Cash on Cash) is a measure of net return generated by TWO sources (i.e. Cash flow and Loan paydown) on an annual basis
- IRR (Internal Rate of Return) can be used to measure the net return generated by ALL FOUR sources (i.e. Cashflow, Loan paydown, Appreciation, and Tax savings) throughout the life of the investment
- Cap Rate (Capitalization Rate) is a measure of how efficient a property generates NOI in relation to the property's cost/value. The problem with cap rate is NOI does not paint a complete picture of a property return (see the "four sources of rental real estate returns" above for a complete picture), so cap rate is a poor measure of return. Cap rate, however, is commonly used a measure of value/risk.