There are several means of determining the return on an investment property.

You may hear the term “ROI” (or “ROR”), which means “Return on Investment” (or “Rate of Return”), which can be calculated in all sorts of ways.

Unfortunately, a lot of people will determine this number based on whatever factors will yield the highest number, regardless of how accurate to real-life it might be.

ROI is very general and encompasses your overall return on investment and it includes a lot of estimates and unproven numbers.

Less generically, a *Cap Rate* is most often given for a property.This term more specifically relates the sales price of the property to the income it generates. It more or less tells you if you are buying an investment property at a good price.

If you are buying too high, this will be reflected with a lower-than-normal Cap Rate. Or reversing the scenario, sometimes a Cap Rate will guide someone on how much to sell their property for.

If there aren’t a lot of comparables in the area to base a selling price off of but the going market Cap Rate is say 7%, the seller can figure out what sales price would yield a 7% Cap Rate.

While the Cap Rate compares the purchase price of a property to the income it generates, the *Cash-on-Cash Return (CoC)* is what tells you how much return you make on the actual money you put in.

So, in terms of an actual return on your money, you want to focus on the CoC Return and not the Cap Rate.

The Cap Rate really only matters when you sale or buy a property, unless it’s a case where you are paying all cash. If that happens, **the CoC will calculate out to be the same as the Cap Rate, w**hich is why these two are related and why I’m talking about them* together* and explaining how to differentiate them.

You are more likely to see a Cap Rate of a property advertised rather than a CoC for two reasons:

1. When a property is listed, i.e.* for sale*, remember *that* is when the Cap Rates matter- during a sale. It is a method of showing you the (supposed) property’s worth in comparison with the income that it generates.

2. Assuming a financed property, CoC can vary per buyer because it is dependent on the financing terms used to buy the property. So one person’s CoC might be different than another person’s CoC for the same property.

Although they are unlikely to vary that much due to interest rates (those only vary minimally in the same time period) it is more likely to vary depending on how big of a down payment a buyer puts down.

Essentially, it will differ depending on what the monthly mortgage expense is which differs depending on the buyer’s qualifications, the interest rate, and the down payment.

**How to Analyze a Real Estate Deal**

Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.

## Purpose and Calculation of a Cap Rate:

Cap Rate is short for **Capitalization Rate.**

**Related:** What is a Cap Rate? (Capitalization Rate)

*Investopedia* defines Capitalization Rate (we just call it Cap Rate for short) as:

*A rate of return on a real estate investment property based on the expected income that the property will generate.*

The Cap Rate is really, in my experience, the one number that you will see listed for almost all investment properties (unless it’s a property that isn’t listed specifically as an investment, in which case, you are likely to immediately calculate the Cap Rate to determine if the property is worth pursuing).

There is debate as to whether a Cap Rate is applicable for single-family properties, versus multi-family or commercial properties, but I use Cap Rates for all properties.

The reason for the debate is that commercial properties are almost always priced based on Cap Rate, whereas residential properties can’t necessarily be priced just on Cap Rate because they have to take into consideration market value.

The debate doesn’t matter for the purpose of this article though, so that’s as far as I’m going to get into that.

*How do you calculate the cap rate of a property?*

**Annual Income / Purchase Price = Cap Rate**

If you look at the equation on *Investopedia*, it actually uses “Total Value” in place of “Purchase Price” and it gives an example about how a Cap Rate changes as the value of a house changes.

This is true, it does change with a change in value, but I’m very strict in reminding people that the value of a house doesn’t matter unless you are trying to buy or sell it.

So, calculating an updated Cap Rate is really pointless unless you are thinking of buying or selling, hence why I use “Purchase Price” instead. To each their own on that one, but anytime I’ve calculated a Cap Rate, it’s been based off of the price of the property as it is listed (for sale).

Back to the equation, I’ll write it out with a little bit more detail just so it’s clear:

**((Monthly Income * 12) / Purchase Price)*100 = Cap Rate**

Often you will know the monthly income rather than the annual income, so just multiply that number by 12 (months) to get the annual income. Then multiply all of it by 100 to convert the resultant number into the actual percentage. So for example you might calculate 0.987 as your answer, so converting that to a percentage gives a 9.87% Cap Rate.

**NOTE: The income you use for this calculation, as with all calculations should be your NET Income. Your Net Income is the income you receive after all expenses are paid. **

**This is different than the GROSS Income you receive, which is the total amount in rents you collect prior to paying expenses. Using a Gross Income in these calculations will give you a completely inaccurate (i.e. unrealistic) result.**

**NOTE: As with all calculations, know exactly what numbers you are using to calculate your Net Income. Don’t be conservative with expenses, don’t use estimated values when you don’t need to and be sure to include vacancy and repair estimates (you do actually have to use estimates for those).**

** Anytime you see a Cap Rate or any calculation of return, make sure you either know or you question what numbers were included to determine that number. People love to make returns better than they really are, so don’t get tricked into thinking a return is excellent because you don’t know if they really even used realistic numbers in determining it. **

Once you have the Cap Rate how do you know if it is a good Cap Rate or not, or in other words, how do you know if this property is a good investment property or not?

Well, it depends on where the property is located and what is is happening in the general real estate economy.

Different cities have different Cap Rates and different areas* within* cities have different Cap Rates, and what is a good Cap Rate in those areas today, may be totally different than what they have been in the past.

So, you have to be familiar with the market in which you are buying to know what a “good” Cap Rate would be.

You also have to consider the type of property you are buying and the growth potential of that property (and market) because those factors will affect the overall ‘market’ Cap Rate that should be expected.

For more details on varying Cap Rates and what to look at, check out: Battle of the Cap Rates.

## Purpose and Calculation of a Cash-on-Cash Return:

*Investopedia* defines a Cash-on-Cash (CoC) return as:

**Related:** Return on Investment (ROI) Versus Cash on Cash Return (CCR)

*The cash income on the cash invested.*

The CoC is a more accurate calculation of the return you will get on the money you invest. As previously stated, (but worth the reminder) the CoC for an all-cash purchase will be the same as the Cap Rate.

But assuming you are financing, the return you are getting on the *actual* money you invest is different because you aren’t putting down the full price of the property, you are only putting down a % of the total price. So you don’t want to use the Purchase Price in the equation, you instead want to use the amount you paid.

**Annual Income / Cash Invested = Cash-on-Cash Return**

The same rules apply here as far as using Net Income (not Gross), multiplying the income by 12 if you only know the monthly income, and multiplying the whole result by 100 to create a percentage format rather than decimal.

## The Trickiest Difference between a Cap Rate and a Cash-on-Cash Calculation:

The biggest difference between the two calculations is the number you use in the denominator of the equation, it being either the Purchase Price or the actual Cash Invested.

*Definitely don’t forget the difference there! *

There is also a less obvious difference though, that trips people up just about every single time they try to calculate these two numbers.

Cap Rates** are not **calculated with the financing cost included as an expense.

Cash-on-Cash Returns * are* calculated with the financing cost included as an expense.

In order to calculate your Net Income, you have to subtract all of your expenses from the gross income.

If you are financing a property, one of your expenses is financing (most often a mortgage payment, so I’ll call it the mortgage expense but it pertains to any type of financing).

If you are financing a property, that’s great, but you have to keep that mortgage payment out of your expenses list to determine the Cap Rate.

A Cap Rate has nothing to with financing or the result of financing, so it cannot be included in calculating an accurate Cap Rate.

On the other hand, since a CoC specifically calculates the actual return on the money you put in, you do include the mortgage payment in your expenses for this calculation.

*I guarantee you, no question, that you will forget this (often) and miscalculate. I’d say 80% of the miscalculations I’ve seen by investors when determining both of these numbers is because they misplaced that mortgage payment in the equations.*

I can’t give you an easy way to remember not to mess up with that but if you calculate a number with either equation that doesn’t seem quite right, you might as well default to checking to see if you put that mortgage payment in the wrong place. I can’t say this enough-

Cap Rates **do not*** *involve financing in any way, not even a mortgage cost.

Cash-on-Cash Returns * do* involve financing because the return itself is completely dependent on financing, so the mortgage cost must be included.

It may seem complicated, when and how to use these numbers, but it’s really not once you get in the swing of using them.

If you decide you only want to care about one number though, be sure it’s the CoC and not the Cap Rate.

The CoC is the actual return on your money which is what ultimately matters in the investing world.

In the case you buy all-cash, this will be the same as the Cap Rate anyway.

To see better how both of these are calculated, in a real-world scenario, check out Rental Property Numbers so Easy You Can Calculate Them on a Napkin and you will get a better big-picture view of using these numbers.

And you didn’t think all that math we learned in school was going to apply to real life!

Welcome to real estate!

Oh, and as a last note, don’t ever buy an investment property (for cash flow at least) without knowing these values. Even with knowing them there is room for error, so be conservative with them and leave some margin for profit!

## 52 Comments

Love it! I’ve lately been wondering the major differences between both and asking myself which investors prefer, cap rate or cash on cash? This was helpful. How does depreciation on a rental property affect your calculations. A big turn key provider in my community say they leave maintenance and repairs out of their calculations because the depreciation when doing your taxes offsets maintenance and repairs.

Ben, maintenance and repairs are operating expenses, and should never be left out of an NOI equation. Now capital improvements via rehab/upgrades, etc., are depreciable and generally not calculated in your pre-tax cash flow. That might be what they are talking about.

Then, why are they leaving their maintenance and vacancy out of their numbers. Do you think it could be to make the property more attractive to potential turn-key providers? How exactly would depreciation affect the total NOI?

Ben, depreciation is a tax write off that lowers your taxable income, so it doesn’t affect the NOI at all. Some turnkey providers consider maintenance and vacancies as “soft costs” (versus hard costs like taxes, insurance, HOA fees), and they either won’t include them at all, or use unrealistic numbers, in order to make the property look more attractive from a ROI perspective.

As Kyle says, a true turnkey should have minimal repairs in the beginning, but was it a true rehab (like roof, furnace, a/c, full kitchen & bath remodel) or a lipstick job (paint, carpet, countertops, light fixtures)? If it was the latter, you are still going to need to budget for maintenance and capex. I’m with him, I’d rather budget for it just to be safe.

As an investor, you need to understand how to calculate all of the different metrics, what the norms are in your area (like the average vacancy rate), and what you can live with (i.e. will you be able to sleep at night). I always budget 10% for maintenance/capex, 10% for property management (whether I’m doing it myself or not), and at least 8% for vacancy. If you have cash flow after these and your PITI that meets your “per door” rule, you should be good, assuming you’re not buying in a Class D area or something.

SHARON — well said; and almost exactly what we tell our clients.

BEN — depreciation does not apply to the NOI. it has nothing to do with the operations of your property. You use it towards your personal tax calculations (tax returns).

Maintenance and repairs should be low with a truely turnkey property however I would rather put all the numbers in andgo from there. They are probably correct for the most part as a $120,000 property with land worth $30,000 will have roughly $3,200 a year in depreciation which should be much more than maintenance and repairs. However capital expenses (future roof, furnace, ect) should alzo be calculated in to get an accurate number.

Ben — depreciation does not apply to the Cap Rate or COC return. These are simple metrics that apply to the financial performance of a property. Depreciation plays into your personal (specific) tax situation since it flows down to your tax return(s).

Thank you everyone. This conversation has been very helpful in regards to depreciation and how it affects the deal, but I’m still confused as to why turnkey providers don’t advertise maintenance and vacancy when selling their homes to investors?

Some do, and unfortunately some don’t. If you don’t see it there, then ask for it, or simply add it in yourself. You need to factor in those two operating expenses one way or another. Keep in mind that you will see variations in the numbers used based on many variables such as location, age, market conditions, etc; and you will get different opinions on these numbers.

Thanks for the compliment above, Marco. And Ben I will take what Marco is telling you one step further and say not to even worry about what a turnkey or a seller or a realtor is telling you. Before you ever pull the trigger on a real estate investment, you need to know what should be there like the back of your hand, otherwise you are playing Russian roulette with your money. Also, even if a turnkey included a vacancy rate, it might not be the rate you are comfortable with, or that you’ve found to be historically true, or that the area stats say is the norm. So just because someone gives you a number, doesn’t mean it is gospel.

There’s a phrase we use a lot on BP, and it’s “Trust but Verify.” Make sure you are really really good at the verifying part, and the trust part will take care of itself 🙂

Hey Ben! Sorry I jumped in late. I’m glad you understand the depreciation side a bit better. I actually work that a little bit differently. Where I see the depreciation come into play as far as the numbers is it really just offsets the taxes you would have to pay on the income you receive from the rental properties. So instead of offsetting maintenance and vacancy, I let it stay more strictly on the tax side. Because if you wanted to get really technical when you run your numbers, you would need to include tax hits to the income you receive. But the big thing about rental properties that is so financially beneficial is that most of those taxes can be offset by different write-offs, depreciation being the biggest. So those tend to cancel each other out rather than anything else being offset by it.

Also, the really good turnkey folks will include vacancy and repairs. But as Sharon said, never care what someone tells you (or doesn’t tell you) in terms of what goes into the calculations and what estimates are used, always double-check yourself and make sure you are comfortable with them. You may have a different comfort level as far as what number to use for vacancy and repairs, so you could change from what they use.

Thanks Marco and Sharon for helping Ben out!

This is a great post with easy to follow formulas. Thanks for taking the time. This cap rate theory really is a science unto itself and near and dear to my heart.

One nuance:

The net income does not reflect the expense of income tax and depreciation, and debt service/interest as you say.

So, some beginners may confuse NOI with EBITDA (expenses before interest payments on debt, tax, and amounts for depreciation and amortization of assets) and there is PTCF (pre-tax cash flow) which are useful in their own ways.

As a single family buy-and-hold model, I only care about the cash on cash rate, which is also the cap rate of my equity contribution, in the first year using annual numbers. Subsequent years’ cash on cash rates are useful but don’t reflect the amortization amounts. The CoC becomes less accurate with heavy amortization or in a rising market.

More theory:

A low first year cap rate may reflect under-market rent, or recent capital expenditures like a new roof or new mechanical. A lower cap rate reflects very positive upside when the rents can be raised.

A high first year cap rate may reflect older roofs and pending/immediate capital expenditures.

Great input Joe! Things to think about for sure. The depreciation and income tax thing got addressed in some responses above so won’t do that one here (in short- I don’t include those because they tend to cancel each other out, and even if they don’t it’s too hard to figure out for sure what the numbers will be and it will always be changing) but the debt interest is known so should definitely hit the CoC equation.

It’s true CoC may change with rent increases or growing markets/equity, etc. but unfortunately that it all in the future and none of it is guaranteed or can be predicted. Some properties may have repairs that will happen that will have known results, etc. but it’s important that people don’t buy a property just based on what they assume will happen but rather what is currently happening. For cash-flow buys at least.

Ali: I realized my mistake right way but can’t edit or delete (?). An increase in value doesn’t change the equity cap rate.

I am looking at a three-property package deal now. I can get in for zero down but first year cash flow is $170 a month for three doors. Trying to talk myself into it, I calculated the depreciation, say $4,300 annually. So my equity cap rate is infinite percent but my cash flow is $170 before management and reserves. I could raise rent by $100 on one immediately, but not until year two on the other two. CoC is the same, infinite percent, but man oh man the numbers still scream that the debt service is too expensive.

Ha, Joe no worries there, I know the ‘no delete’ problem quite well 🙂

Well zero down is hard to beat, but what would be the cash flow after expenses on the properties?

In your post “Rental Property Numbers so Easy You Can Calculate Them on a Napkin” I’m confused on the calculation done on the napkin. You have written Cap Rate = Annual net (minus mortgage)/purchase price 9168/94,500 = 9.7%. Cash flow $358/mo Mortgage: $406/mo

I’m lost on the “annual net (minus mortgage)” part. I get the math: annual net ($358 * 12 = $4296) + mortgage ($406 * 12 = $4872) = $9158 but I don’t understand why it’s written Annual net (minus mortgage). I was subtracting the annual mortgage payment from the annual net based on how I read it.

After I looked at it again I calculated this way: income ($1325) – ALL expenses ($967) = $358

Then added back the mortgage $406 + $358 cash flow = $764

Then multiplied by 12 ($764 * 12 = $9168)

End up with the same number I just would like to understand “Annual net (minus mortgage)” as it may be easier and I’m just missing it.

Sorry for the book

Sorry Arthur, it’s just a difference in wording. It really should be “less mortgage”, but it depends on whether or not you already added the mortgage payment into the expenses or not, because you may need to subtract it. Whatever the wording, just don’t include the mortgage payment into the expenses for that equation. That’s all that matters.

I only pay attention to cap rate on multi families, not SFR, simply because those are sold based on comps, so no one is gonna sell to me just because my cap rate says their value should be “X,” and there’s no means to find out what the average cap rate is for SFR’s, since it isn’t a metric commonly associated w/ SFR’s, at least in my experience. I know, I know, everyone is different, so to each their own, but that’s my take on it.

COC is a great snap shot when you are buying, and I do use it, but really, my most important number is cash flow. And I think a better way to restate the COC equation so that people don’t forget to include the mortgage payment is to say “Annual Cash Flow/Cash Invested,” Where Cash Flow = NOI – Debt Service. This is how I’ve always done it, and it’s worked for me 🙂

Great article for people who are struggling with these concepts.

Good input Sharon! Yes, the equations get tricky and I think different wording works for different folks. I’ve yet to have figured out one way to word it so that everyone understands completely. Lol. If everyone can just understand the components, they can come up with whatever wording helps them remember. Shoot, I know the equations like the back of my hand and I still sometimes leave that stupid mortgage payment in on a Cap Rate and can’t figure out why my numbers look odd. 🙂

I have seen Cap Rates come in handy for SFRs. It’s probably because of how many I work with and in so many different markets, but every does tend to produce a ballpark Cap Rate for the property types. Like if I was evaluating a property in Philly right now and even if the cash flow looked nice, if it was only a 7% Cap Rate I would run because I know of a huge number of good properties there going for a 12% Cap Rate. But yes, to your point, cash flow is ultimately what matters and the CoC over the Cap Rate. The Cap Rate is a lot like the 2% Rule and the 50% Rule, more of a guideline to get you started rather than a final number.

I will totally agree with you that using cap rates to compare markets for SFR could be hugely beneficial – great point Ali! Just so people understand they’ll have to be the ones calculating it, since most realtors would look at you like you had tentacles growing out of your head if you asked them what the prevailing cap rate was lol!Thanks!

LOL Sharon. Yes, in fact they would. That’s hilarious. All the more reason to support the assumption that most real estate agents (god bless them) have no clue how to work with investors. That might be a good interview question for an investor looking for an agent to work with- “how do you calculate cap rates?” And if they don’t freak, you might have a winner.

Hey Ali, really good post! This stuff is what we need to cover that nobody takes time to talk about. Two thumbs up!

Thanks Jaren! I’ll put my two thumbs up back at you so now we have four! 🙂

Thanks Ali. Another great article. I can’t believe the amount of great free advice. Outstanding.

You’re welcome Matt. As far as the free advice, thank Josh (the BP owner) for that one!

@Ali Boone Ali – You’ve done a great job explaining these concepts in a way that makes sense and is easy understand. I agree completely that many folks don’t recognize what should (and should not) go into cap rate and cash-on-cash. They end up making erroneous and misleading calculations, and perhaps some bad decisions. The math is not hard, but it’s essential to be adding up and dividing the right numbers. So it’s really a matter of mastering the vocabulary.

If I can extend your discussion of fuzzy nomenclature just a bit… Another — and related — place where I see a good deal of misunderstanding is in the use of the term “expense.” For real estate investors, there are basically two types — operating expenses and tax-deductible expenses — they’re not the same and it’s important for investors to distinguish between them. Operating expenses include items like insurance, maintenance, property tax, etc.; but do not include mortgage payments, capital expenditures or depreciation. The main reason it is important to use the correct definition of operating expenses is that it is part of the calculation of Net Operating Income (Potential Gross Income minus Vacancy and Credit Loss minus Operating Expenses = Net Operating Income) — NOI is a key real estate investment metric and, as you emphasize, it is what you need in order to make a proper cap rate calculation.

The other type of “expense” is the one that affects your calculation of taxable income. The interest portion of your mortgage payment is an example of a tax-related expense that is in fact not an operating expense.

I often see reference to “mortgage expense,” by which investors usually mean the entire mortgage payment, not just the tax-deductible interest. Using the term “expense” seems logical enough here (after all, it’s coming out of your pocket), but it can be confusing. I prefer to use “Debt Service,” which is clearly a cash flow item. I always tell my students that you might need a mortgage to buy a property but you don’t need one to operate that property, so the mortgage payment (i.e., debt service) is not an operating expense; and the principal reduction portion of that payment of course has no effect on your taxes, so it’s not a deductible expense either.

Again — great and useful article.

Frank — great clarification on those often overlooked nuances. Just like you detail in your book (which I highly recommend), there are little details that most investors don’t pick up on without some experience using these financial metrics.

Frank, definitely great insight! I typically don’t include the differentiation of tax-deductible versus not only because of the balancing out of the income tax with the write-offs (never a certainty or exact, but fairly general depending on the property). The harder part is knowing how to most accurately include the write-offs and the taxes and such because they differ so much and I speak for myself when I say, I am tax-stupid. I wouldn’t be able to include all of that if I tried. Lol. BUT, that is all the more reason to make sure you are as conservative as possible with your numbers and you always have margin for fluctuations.

The reality is that even if you are beyyyyond accurate in calculating numbers on rental properties, all it takes is one hiccup to throw every single number into the trash. There’s no way to account for every single digit in returns. So the best you can do, after being smart with knowing how to best calculate numbers (this is not an argument to support people slacking on numbers and where they get them from), is be conservative and have margins.

You do bring up a very good point for people to consider- while the “mortgage payment”, which does in fact include the principle payment and interest, doesn’t matter in calculating cash flow, it does matter in realizing your equity build on the property as you continue to pay down that principle. Another super cool bonus of rentals! So for that, yes understanding the differentiating there is great. Good call on that.

@Ail Boone Ali — In our analysis software for the past 30+ years, we have always shown the calculation of tax liability and the consequent after-tax cash flow as a completely separate branch (starting with NOI), to keep it independent of the before-tax cash flow. I think that makes for a much cleaner presentation, easier to understand.

Interestingly, in the past year, or so we have found fewer and fewer of our customers focusing on the after-tax projections. I think this may in large part because of recent changes in the tax code. Now it is virtually impossible to isolate the tax implications of a single new investment. Your tax liability now is inextricably linked not only to your outside ordinary income, but also to the cumulative performance of — taxable income, captial gains, etc– of your other investments. So, for example, if you decide to sell some other property and experiece a large enough gain, or if another investment generates signifivant taxable income, those external events may push you over certain threshholds that make you subject to the so-called “medicare tax” (aka NIIT), or increased capital gains taxes.

What I hear from our investors customers is something like, “If the doesn’t make sense before taxes, I really don’t have much hope that it will make sense after taxes.”

Oh totally Frank, ha. Yeah, no if it doesn’t make sense before taxes, most certainly after-taxes won’t be pretty.

Thanks for the breakdown. I was trying to figure out Ali’s equation and now I see it’s because I included the mortgage payment. Moving forward I’ll revise my excel spreadsheet to excluded the mortgage and will remember mortgage as a Debt Service. Thank you again for the clarification and helping me see the “light”.

Great job Ali! You’ve provided a lot of quality information that many people will benefit from. I’m definitely saving this one, as I know I will be able to refer people to it many times.

Thanks Karen!

Thanks so much for writing. This was extremely helpful.

You’re welcome Ben!

Great article defiantly helps, only question i had and I’m sure its a silly one. When figuring the cap rate and using the purchase price. Correct me please, this would not include and repairs you have figured into the budget correct?

If the repairs and such are not included in the cap rate, then they would be used when figuring the CoC correct ? Simply stated adding them to the down payment and financing cost ?

Thank you

Ceasar, are you talking about rehabbing properties or just basic maintenance? For the most part, I would include the costs. For a rehab on a house, I would use them for sure.

Very Good and interesting post & comments.

Please do not forget to consider or do a Net Present Value (NPV) analysis and to consider taxes & fees on sale when it’s time for you to cash out of a property.

Capital gains, ObamaCare taxes, depreciation recapture taxes & fees can really take a bite out of your equity (your apparent gain in RE over time). In America the buying power of our dollar tends to go down, and our rates of taxes tend to go up, or new taxes like the 3.8% ObamaCare tax on all gains seem to just appear.

Wilco James!

I’m new to learning about REI. I’ve never seen these two terms explained more clearly. Thank you!

You’re very welcome Ryan!

Was looking for the place to get the FREE Book on Investing??? Did I miss it somewhere??? Thanks… Blessings…

No idea, Terrence…

Such an excellent explanation! I’ve been researching cap rates and exactly how to figure them for a few weeks (kept double checking to make sure I’m doing it correctly), and this is the FIRST time I’ve seen it explained so well. I did not know that the loan/mortgage payment was not supposed to be figured into the cap rate. I never read that anywhere in my research! I kept wondering why the rate looked so low when I was playing with the numbers of my own properties that I know are making us a higher return than what my calculations were showing me. I was using some known properties as a litmus test for my calculations. I’m glad I kept searching when the numbers didn’t make sense. Thanks again!

You bet, Deborah! Glad it helped 🙂

THANK YOU ALI FOR ANOTHER GREAT BLOG POST! Teaching me real estate one post at a time. Appreciate it bruh!

You bet Eliseo!

So, if you are contemplating purchasing a property at say $80,000 that will need a $20,000 rehab, the purchase price for calculating CAP rate would be $100,000?

Correct Jackie.

Thank you!! I think we are depending too much on CAP rate. We paid cash for the property and for the improvements to get to the $100,000. If rent, taxes, insurance, and mgmt fee stayed the same for year 2 on this property, the CAP rate would not change, correct?