Cash on Cash Return on Investment and Capitalization Rates

Bonus Module

When you're analyzing real estate deals, two metrics often come up:

• Cash on Cash Return on Investment (Cash on Cash ROI) and

• Capitalization Rate (Cap Rate)

These powerful tools can help you evaluate potential investments and make informed decisions.

They provide different perspectives on a property's performance and can guide your investment strategy.

We'll dive deep into Cash on Cash ROI and Cap Rate and you'll learn:

• Key Differences - How Cash on Cash ROI and Cap Rate differ and what each tells you about an investment.

• Investor Preferences - Why some real estate investors favor one metric over the other.

• Calculation Methods - The basic formulas and a deeper look at what goes into each metric with the end goal of understanding how to improve each.

• Automated Tools - Where to find these calculations in The World's Greatest Real Estate Deal Analysis Spreadsheet™ and the Return Quadrants™.

• Improvement Strategies - Why you might want to improve these metrics and how to do so.

Let's get started with understanding the basics of Cash on Cash ROI and Cap Rate.

Table of Contents

Here’s what we will cover:

• Introduction to Cash on Cash Return on Investment and Capitalization Rates

• What is Cap Rate?

• What is Cash on Cash Return on Investment (ROI)?

• What’s the Difference Between Cap Rate and Cash on Cash ROI?

• Cap Rate versus Cash on Cash ROI

• Cap Rate on Multi-Family Properties

• Property Value from Cap Rate

• Cap Rate and Cash on Cash ROI Calculated for You (The World’s Greatest Real Estate Deal Analysis Spreadsheet™)

• Deeper Dive into Cap Rate and Cash on Cash ROI Calculations

• Return on Investment Quadrants™ and How Cap Rate and Cash on Cash ROI Fit In

• Improving Cap Rate on Investment Properties

• Improving Cash on Cash Return on Investment

Cap Rate vs Cash on Cash ROI

When you're analyzing real estate deals, two key metrics you'll want to understand are Cap Rate and Cash on Cash Return on Investment.

While both provide insights into a property's financial performance, they do so in different ways.

What Is Cap Rate?

Capitalization Rate (Cap Rate) measures how much income a property generates relative to its purchase price. The formula is simple:

Cap Rate = Net Operating Income/Purchase Price

If you're evaluating a property you already own, you can replace the purchase price with the current value. This adjustment becomes important when using Cap Rate to estimate a property's current market value. We’ll talk about that in just a moment.

What Is Cash on Cash ROI?

Cash on Cash Return on Investment (Cash on Cash ROI) looks at how much cash flow you're receiving relative to the amount of cash you invested. The formula is:

Cash on Cash ROI = Cash Flow/Total Cost to Close

This calculation focuses specifically on the return generated from your actual cash investment, ignoring the property's overall value.

What’s the Difference?