Which one is more important should we focus on. Cap, Cash on Cash Return or Inernal Rate of Return?

Highly appreciate all of your input. Dave
In Buying Property - Asked by Good D. - Jan 12, 2014
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Answer(s)

arthur f.
Owner/Investor
New York, NY

Cash flow is always the primary criteria.

Jan 13, 2014
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Michal B.
Broker/Agent
Miami Beach, FL

It really depends not on your investment strategy but also comparing a particular investment opportunity to other properties that you acquired.
Cap rate does not take into consideration any debt service. It strictly evaluates net operating income of a property in relationship to the price paid. What you need to further investigate is is there is room to increase potential income, i.e. increase rents charged and lower operating expenses for the property. Many big commercial brokerage houses publish typical cap rates for various property types in your market.
Cash on cash returns is a ratio of after debt cash flow over cash invested which you gives you a good picture if you have the loan data and property financials available. IRR ratio provides a compounded series of cash flows over a period of time. Prior to an acquisition of a property this number will be simply an estimate or projection of what you anticipate regarding cash flows, ( increasing income/ reducing expenses, refinance, etc.) and finally a disposition price.

Jan 13, 2014
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Eric J.
Corporate Investor
San Ramon, CA

That depends on your/your companies objective. Typically, individual investors and small companies seek cash on cash returns (cash flow) due to its ease of use, it is a simple calculation. Cap rates is a measurement of how fast the original purchase price will be returned, and IRR's are a measurement larger companies use for a more precise and all encompassing picture of how an investment is performing.

Jan 13, 2014
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Sonu S.
Owner/Investor
Washington, DC

All three should be focused equally. In simplest term cap rate tells you what your return is for one year if you buy property with all cash. Cap rate will increase if your cash flow increases. Cash on cash return indicates return you receive on the money you put out of your pocket. Internal rate of return (IRR) is a discount rate or rate of return or interest rate which makes your net present value = 0. Positive IRR means property is worth investing into. In order to understand IRR you have to understand the concept time, value and money. (which covers topics like present value (PV), future value(FV) and net present value (NPV).

Jan 14, 2014
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Ahmed Z.
Lender/Mortgage Broker
Long Beach, CA

it depends if you are financing the property or paying for it in cash. if you are paying for the property cash then you should be looking at the CAP. but if there is lending piece involved , I will look at the property cash flow for sure.
a lot of buyers fail to see eye to eye with the lenders since they don't cash flow the property properly. they should be factoring in Vacancy rate , interest paid , managment fees and of course Taxes and insurance , cost of maintain the proeprty.
after all set and done you should be able to get NOI on the property of 1.25 or better.

Jan 14, 2014
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Caren K.
Broker/Agent
Jersey City, NJ

Yes, Cash flow is always first reference. Cash on Cash Return is almost certainly the most significant ratio. To keep this ratio you need to focus on when evaluating the long term performance of a property investment.

Jan 15, 2014
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James S.
Owner/Investor
Fort Lauderdale, FL

Cap rate

Jan 16, 2014
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Kevin M.
Broker/Agent
Grayslake, IL

Focus on all 3. Remember though that cash flow is always the most important. Once you get past the initial investment return (CAP) , you will want to focus on your IRR to determine how said cash flow will weigh against the opportunity cost of other investments. At the same time, you will be weighing your cash on cash return along those same opportunity cost guidelines.

Jan 17, 2014
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Chuck W.
Broker/Agent
Cheyenne, WY

a cap rate and cash on cash only measure one years investment value and usually based upon a prior years income. an IRR or FMRR for more complex analysis is much more accurate predictor of the value of an investment held for multiple years. CCIMs are specially trained in this application and use.

Jan 17, 2014
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Glen W.
Lender/Mortgage Broker
Atlanta, GA

Cash flow is most important. One tip, I've seen many borrowers have optimistic NOI numbers by being very light on their expenses, etc... When you are looking at a property make sure you are realistic both in your expense number (maintenance, repair, upgrades, mgmt, etc..) and your income expectations to get a good picture of your actual return.

Jan 27, 2014
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Glen W.
Lender/Mortgage Broker
Atlanta, GA

Cash flow is most important. One tip, I've seen many borrowers have optimistic NOI numbers by being very light on their expenses, etc... When you are looking at a property make sure you are realistic both in your expense number (maintenance, repair, upgrades, mgmt, etc..) and your income expectations to get a good picture of your actual return.

Jan 27, 2014
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Frederick C.
Broker/Agent
Hillsborough, NJ

One should be versed in all three methods to evaluate an investment opportunity. The most important one at any give time (during a deal) is the one your client is using to evaluate the particular investment. The are many investors who are masters at using leverage (cash-on-cash return), and some investors only think in terms of cash (CAP rate), and some investments make more sense using one method of analysis over the other.

Feb 20, 2014
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John G.
Broker/Agent
Savannah, GA

As others have indicated, I believe that all have merit and it truly depends on your goals and objectives, utilization of financing, cost of funds, etc... It is important to note that while Cap Rate and Cash-on-Cash return can be calculated and evaluated based on the first year of owning/operating the property, in order to use IRR you have to make an assumption about selling the property. IRR looking backward or projected for potential investment can tell you more about the overall performance/return of an investment asset than Cap rate or Cash-on-Cash because it encompasses cash flow throughout the holding period , leverage/financing, and appreciation/gain, but as an underwriting/evaluation tool it has it's risks because you are forced to make assumptions about exiting the property. When using IRR it is important to be cognizant of how much return is driven by cash flow versus appreciation. If you have the choice, I would always prefer an investment vehicle with a good balance as it minimizes risk.

Feb 25, 2014
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John G.
Broker/Agent
Savannah, GA

As others have indicated, I believe that all have merit and it truly depends on your goals and objectives, utilization of financing, cost of funds, etc... It is important to note that while Cap Rate and Cash-on-Cash return can be calculated and evaluated based on the first year of owning/operating the property, in order to use IRR you have to make an assumption about selling the property. IRR looking backward or projected for potential investment can tell you more about the overall performance/return of an investment asset than Cap rate or Cash-on-Cash because it encompasses cash flow throughout the holding period , leverage/financing, and appreciation/gain, but as an underwriting/evaluation tool it has it's risks because you are forced to make assumptions about exiting the property. When using IRR it is important to be cognizant of how much return is driven by cash flow versus appreciation. If you have the choice, I would always prefer an investment vehicle with a good balance as it minimizes risk.

Feb 25, 2014
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