What’s the difference between ROI and CAP Rate?

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One of our newer forum members recently asked:

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“What’s the difference between ROI and CAP Rate?”

Thanks to one of our resident experts, Ryan Webber, he got a perfect answer:

ROI is your return on investment factoring in your financing. Its your annual cash flow after all expenses divided by your initial investment (out of pocket expense). ROI depicts the true percentage that you will make on your money in the first year. Capitalization rate (cap rate) is your ROI if you paid cash for the property. It doesn’t include financing. It is a better way to compare apples to apples and take financing differences out of the picture. Cap rate is factored by taking your annual Net Operating Income (NOI), which is your gross income minus all expenses except debt service (principal and interest mortgage payment), and dividing that by the purchase price of the house.

Again, Cap Rate is the percentage you would make on your money if you paid cash for the property, and ROI is what your actual percentage is when you factor financing into it.

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About Author

Joshua Dorkin

Joshua Dorkin (@jrdorkin, Google+) founded BiggerPockets.com when he saw a need for free, trustworthy information about real estate investing online. Over the past 12 years, Josh has grown the site from self-funded hobby to full-time job and passion. Today, BiggerPockets brings together over 850,000 members, housing the world’s largest library of real estate content, iTunes’ #1 real estate podcast, and an array of analysis tools, all geared toward helping users succeed.


  1. Great Post. Next up: Discounted Cash Flows. Cap rates are a must know before you start to value a property using the discounted cash flows method. Great explanation though on the ROI vs. Cap Rate question.

  2. Why would you ever use CAP over ROI?

    When I see a property, I want to know all of the expenses compared to profits so I can get a realistic expectation of what will happen to my investment.

    CAP rates seem like they are better for those trying to sell a property.

  3. Funny, I was thinking why would you ever use return on investment instead of cap rate? The rate at which you borrow is variable. All that is needed to know is the cap rate to know if it’s a good investment. If the cap rate is 10%, then as long as your mortgage rate is below that you will be positive (assuming interest only payments). If principle and interest are paid, then your equity break even point will be a cap rate equal to the mortgage rate.

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