Cap rate (NOI / purchase price) is really a snap shot of a property's one year of NOI. When purchasing an investment property, using a Cap Rate is only one form of analyzing an investment. ROI is another tool to determine the investments return. It is used by calculating (gain from investment - cost of investment) / cost of investment. However, if you purchased a property and held it for five years and then sold it at a gain, you can use ROI to figure out your return at the end of five years. It really gives you a percentage gain or loss over a given time period. But to truly understand and determine your rate earned on each dollar that remains in an investment property, using an IRR method will give you a yield on your investment over a five, ten..etc...year holding period.
Oct 18, 2009