ROI vs Cap Rate, and what to include in calculation

[Heath Reid]

New investor here. Is there a difference between ROI and Cap Rate? Also, should the monthly mortgage payment be included in the calculation of either of these? Thanks!

[Peter M.]

Spend some time on investopedia, it will have that answer and much more. Cap rate is a very broad metric that only applies if paying cash. It is not very useful for first time residential investors. ROI would take into consideration if you used financing..

Cap rate: Yearly return(NOI)/purchase price (all cash)

ROI: Yearly Return(NOI)/money invested

i.e.

If you get 12,000 in rental income(minus all other expenses) each year and buy it for 120k, Cap rate is 10% (12000/120000)

If you buy the same place but finance it with a loan at 20% you would invest 24,000 but you would have to subtract the mortgage payment, lets say 5,000 per year ROI would be 29.2% ((12,000 - 5000)/24,000)