I would like to arrive at CapRate for performing note investments.  Is it simply the annualized interest income of the borrower payment divided by the market value?  Please advise.

Thanks,

Ray

I look at yield to maturity, factoring in monthly servicing costs.

@Ray Trounday

Cap rate is a term referring to an annualized return from rental income for a real property investment.

The somewhat equivalent for a note would be the effective yield. However, this may understate the return on investment If the note is paid off early, if principal payment reductions are made, or if the note has a balloon.

@don konipol 

Do you happen to have an Excel formula that incorporates note paid off early, principal payment reductions or balloon?

Thanks in advance,

Ray

@Ray Trounday

Use XIRR and put payment amounts and dates and it will provide you the yield.

If the loan calls for regular monthly payments, the RATE() formula works well to produce an annualized yield.

=RATE(nper, pmt, pv) * 12

nper = Number of payments remaining

pmt = payment amount (you can also reduce this by your monthly servicing cost to get a more accurate yield)

pv = amount you paid for the loan, i.e., your cost basis

Originally posted by @Mike Hartzog :

If the loan calls for regular monthly payments, the RATE() formula works well to produce an annualized yield.

=RATE(nper, pmt, pv) * 12

nper = Number of payments remaining

pmt = payment amount (you can also reduce this by your monthly servicing cost to get a more accurate yield)

pv = amount you paid for the loan, i.e., your cost basis

 This is what I do. I'll use (pmt-month servicing cost), and then I'll add fixed expenses to the PV (due diligence costs, recording fees, etc).