Realtor · Tampa, FL · Member since 2018 · 93 posts · 44 votes
Here in the Tampa Market we are seeing inexperienced investors wanting to purchase buy and hold properties but not sure what line to look at when evaluating deals.... Cap rate seems to be the common term. If you are financing and holding a property for 5-10 years shouldn't the IRR be the most important number to look at?
- CoC is a measure of return generated by TWO sources (i.e. Cash flow and Loan paydown) on an annual basis
- IRR can be used to measure return generated by ALL FOUR sources (i.e. Cashflow, Loan paydown, Appreciation, and Tax savings) throughout the life of the investment
I agree with you. IRR and COC. It is actually irrelevant whether or not you are financing, holding 5-10 years or longer. I calculate "cap rate" just in case I run into sophisticated investors and they ask for it. Not really sure what they do with it tho.
@Immanuel Sibero cap rate does not take into account the debt service so that is where financing comes into play. I teach investors and agents classes on what to look for and evaluate a property based on the COC first for sure. Cap rate just seems to be the first term everyone throws out without really knowing what it means or how it is calculated.
Agreed! Cap rate, as it was intended, is not even a performance measure. It's rather a valuation/risk metric. But it is often used as a performance measure because it happens to have the same formula as YIELD which IS a performance measure. Cap rate is used in other investment space, but only in real estate where it is used as a performance measure. Seems like this is the only topic I post on BP :-)
Cap rate doesn't care where you got the money, only what it returns. Cashflow expressed as dollars doesn't care how much you've invested, it has no percentage aspect to it and is utterly subjective. Both ignore appreciation, leverage and tenants paying down your mortgage, which are the real keys to gain for many of us.
@Johann Jells exactly where IRR/COC comes into play. It does calculate all of the above.
No, not really. One can have a leveraged property with negative cashflow and a substantial positive return after adding capital paydown, depreciation tax benefit, and appreciation.
- CoC is a measure of return generated by TWO sources (i.e. Cash flow and Loan paydown) on an annual basis
- IRR can be used to measure return generated by ALL FOUR sources (i.e. Cashflow, Loan paydown, Appreciation, and Tax savings) throughout the life of the investment
Cash flow is different from COC. Our formulas take into account everything you mentioned.
I think most people view CoC as "cash in, cashflow out" rather than including the noncashflow returns. But many folks here don't even go that far, talking about "cashflow per door" rather than per $ invested.