While the Cap Rate calculation is the similar to the Cash-on-Cash calculation, you do not consider your buy-in. Instead of the initial investment, you consider the market value. Cap rate is a market-driven metric, measuring the attitude and behavior of the market. The Cap Rate is very helpful when comparing similar investment properties that you are interested in purchasing. Since it is financing agnostic, the cap rate measures an investment relative to the market, not your own personal financing capabilities. This allows for an at-a-glance comparison between properties, as well as monitoring a property over time. To calculate the cap rate, you would divide the net operating income by the market value.
Current value of the property
Your income might include rent, parking income (if you charge extra for parking), coin laundry income, maybe you have a billboard on the roof that you generate income from.
Make it Net
Don’t forget to subtract your operating costs. This will include HOA fees, property taxes, general maintenance, property management, groundskeeping, and insurance. This should not include loan payments.
Stick with us! Stay Tuned~ Our next post will discuss the ever-important IRR metric for RE Investments.