CAP RATE Capitalization Rate is simply the net operating income (NOI) of the investment property divided by the selling price. For example, a multi-family property has a NOI of $100,000 per year. If an investor wants to pay no more than 7.0% cap rate he would pay $1,428,571 ($100,000/.07).
If you are a stock market investor, you may be familiar with the P/E ratio of a stock. This is the price/earnings ratio or capitalization rate…the same principle. A stock selling for $20.00/share and it has earnings per share (EPS) of $2.00/share, then it has a P/E ratio of 10 or a capitalization rate of 10.0%.
CASH ON CASH RETURN
This is a term (just like CAP rate) that is widely used by real estate investors. This is the amount of cash (either pre-tax or after-tax) that is generated by an investment property divided by the amount of cash you have invested in the property. Most investors will ask you what the cash-on-cash return is or what the cap rate is. For example, the net cash you have invested in a property is $80,000 ($100,000 down payment less $20,000 of seller credits at closing) and the cash generated by this property, after-tax, is $15,000. Your after-tax cash-on-cash return is 18.75% ($15,000/$80,000).
Oak Brook, IL.
Jan 6, 2014