How to calculate Cap Rate with 100% OPM?

5 Replies

If you use 100% OPM for an investment home, do you still calculate and consider the Cap Rate as usual? Even the down payment is not personal money (Asset line of credit) then the rest of mortgage is bank loan. 0% down. If you cap rate is still low, but cash flows, isn’t this still good investment since its infinite returns?

First, CAP Rate doesn't apply to residential homes. It's only used for commercial REI.

Second, CAP Rate has nothing to do with the DP standing alone. It's based on the total price you paid, financed or cash buy doesn't matter.

Not necessarily because in exchange for that minimal cash flow you are absorbing a lot of risk.

Instead of being on the hook for large loans, what if you were signing up for a prison sentence? "Here, I'm going to loan you $100,000, and we're going to make $200 per month profit and split it, but if anything goes wrong and you need out and can't give me back my $100k you have to do a 10 year prison sentence". Probably you wouldn't agree to that, right? 

Just because you are using other people's money doesn't mean you have been absolved of risk.

@Chris K.


Cap rate = net operating income / Purchase price

Cash on cash return = (net operating income - debt service) / amount of cash invested

Now, addressing the "is it a good investment" question:  Who knows.  Not enough info.  

1 - What are you buying it for?

2 - Are you buying it at its appraised value, or less than it...and inheriting equity in the process?

3 - What IS the actual cash flow?

Just because you're not coming out of your pocket to buy doesn't make it a good investment.  The lowest DP out of pocket possible is a very important part (because the ONLY cost to you is the cash out of your pocket), but not the "end all".  The other parts of what makes a good investment is how the rest of the cost is handled (the terms) and how much positive CF you will be getting which dictates how fast you get your cash (your total cost in other words) back.

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