Cap Rate VS Cash on Cash Return

Cap Rate VS Cash on Cash Return

If you're a beginner a real estate investor or just thinking about beginning to invest in real estate I want to talk to you about some terms that you probably hear thrown around quite frequently which are cap rates and cash on cash returns. I'm going to start with cap rates because it's a little bit easier to understand I think and a little easier to calculate although you know both terms have a sort of a separate purpose and they're both beneficial to use and look at um so let's start with cap rates.

Cap rate ignores the mortgage okay if there's a mortgage on the property it kind of ignores it and it just looks at what is the current value of the property and then divides that by what the net income of the property is so all the rents minus vacancy and minus maintenance minus management you know all the things you spent money on the property how much net income was leftover at the end.

So here's a simple example for you if you had a $100,000 property after paying all the expenses property taxes and management and all that stuff you're left with an $8,000 profit that would be a cap rate of 8 percent which of course would be amazing most rental properties right now we're seeing cap rates closer to six percent all right,  it depends on the market but here in the Phoenix area, most investors are pretty happy to get a six percent on their cap rate.

Now, the downside to cap rate is it doesn't really factor in your mortgage you know if you have a mortgage on the property it doesn't really help you understand how much money you're making.

A  cap rate is beneficial to help you analyze how one investment performs against another investment but it doesn't really help you understand what your actual return on your money is going to be and that's why I also like looking at cash on cash returns because I feel like this factors in a little bit better if you're going to be using a mortgage and it helps you understand like I mean if you're  investing money in the stock market right if you put a hundred thousand dollars into the stock market and a year later your money between your dividends and what is currently in the account is now $110,000 well you know you got a 10% return and that's usually how we think about our money is what kind of return are we getting on our money and that's why I like the cash on cash return let's just use our simple example again of saying that we bought a $100 000 house and we put 20 percent down on it so we have $20,000 into the property you can add in closing costs and some other things like that but i'm just going to use that 20 000 to make the math simple for now.

So you put $20 000 into it then how much money did you make on that 20 000 a year later so let's say a year later the value of the property is now a hundred and ten thousand dollars so your twenty thousand dollars that you initially put in is now has now gone up you have an additional ten thousand inequity so you already have a fifty percent return you could sell the property, get your 20 000 back plus get your 10 000 in increased value so your 20 000 turned into 30 000 right that'd be a 50 return but you also have to add in any cash flow that you got from the rent so let's just say that your leftover cash flow on the rent was $500 a month that'd be pretty good of course but I'm just you know trying to use nice round easy numbers here so $500 a month and you had it rented out all year that's an extra six thousand dollars in cash flow for the year. So you made ten thousand dollars in equity and you made six thousand dollars in cash flow so your twenty thousand created thirty-six thousand because your twenty thousand still there hasn't disappeared it's still in the equity right so you still have that and it gained sixteen thousand dollars so I can't do that math in my head but your cash on cash return almost doubled your $20,000 turned into $36,000.

So whatever that is a 75 return that's what the number I really prefer to look at because it really looks at what you bought the property for instead of the current value is interesting to know and the cap rate is helpful so you can compare investments versus other investments to determine which one is the best but really what I want to know is how good is my money doing for me right? I can put my money in the $500 and I know that in the long run, I'm going to get a 10% return how is my real estate performing versus that because if I'm not getting 10 returns then I might as well invest in the s p now obviously over the past two years the real estate market has been absolutely on fire but I can tell you that between the cash flow and equity gains most of our properties are seeing around a 100 percent cash on cash return each year.

So anytime I buy an investment property and I put $50,000 into it within a year between my cash flow and my equity I'm getting another $50,000 in wealth back so that's why I love rental properties is actually crushing uh what the average stock market returns are doing so I hope you found this a little help if you have a rental or you're thinking about getting a rental and you want me to help you understand what your cap rates or what your cash on cash returns might be I would love to sit down with you. I've got a spreadsheet for all this on my rentals and we can share notes and see how you're doing on your properties. I look forward to talking to you soon..

What does this mean to you? If you're even a little bit interested in learning more about participating in the Phoenix housing market as a seller, buyer, or investor... you NEED to know this stuff! Or at least work with someone who is obsessed with the market stats. Reach out to me today so we can start working on making your real estate dreams a reality!

More videos here!

Is it better to Invest in Stocks or Real Estate? - Investing Insights
Making the decision to invest in stocks or real estate can be a difficult one. In this video, we break down the pros and cons of each investment and help you decide which is best for you. Want to become a better investor? Make sure you're subscribed to this channel and follow me on Facebook and Instagram at @ResilientRealtor! Merrill Jencks 480-466-6320 | [email protected]
The Secret to Managing Multiple Properties - Investing Insights
Do you own more than one property? Do you manage them all on your own? Managing multiple properties can be a lot of work. But it doesn't have to be! In this video, I share some tips for managing your properties with Rental Hero so that you can spend less time and money on management, and more time doing what you love. If you want to strengthen your investing skills, make sure you subscribe to this channel and follow me on Facebook and Instagram at @ResilientRealtor. Website: https://merrill.bighelpergroup
What Maintenance looks like as a Landlord - Investor Insights
If you're looking into getting started in real estate investments, it's important to know what types of maintenance you'll likely be dealing with. In this video, I talk about the different types of maintenance and repairs that come with being a landlord. If you want to become a rockstar real estate investor, make sure you subscribe to this channel and follow me on Facebook and Instagram at @ResilientRealtor. Merrill Jencks | 480-466-6320 | [email protected]
Inflation avoid it by investing in Real Estate
Float Down Policy
Are you looking to buy a home soon and working with a lender? Make sure you lock your rate before rates rise, and talk to your lender about a "float down policy" and if that's a possibility for you! So many people don't know about this float down option, so it's worth talking to your lender about! If you want to learn more about buying and selling real estate in today's real estate market, make sure your subscribed to this channel and follow me on social media at @BigHelperGroup and @MerrillJencks
Buyer contingencies to get out of a contract
How to Retire by Investing in Real Estate
Do you want to learn how to Retire by investing in Real Estate? There are lots of ways you can get ready to retire. One of the best avenues to retirement is to invest in real estate. If you want to become a better investor, make sure you're subscribed to this channel and follow me on Facebook and Instagram at @bighelpergroup or @merrilljencks!
What does "Contingent Sale" Mean in Real Estate?
What's the best way to structure a contingent sale in Real estate? What does contingent even mean? People want to know how they sell their house and buy a home without being homeless in between the move. There are ways we can prevent that! Watch this video to learn how to protect yourself and move from one house to the next seamlessly. If you want to learn more about buying a selling real estate, make sure you're subscribed to this channel and follow me on Facebook and Instagram at @BigHelperGroup and @Me
Cap Rate VS Cash on Cash Return
What's the difference between cap rate versus cash on cash return with regard to investing? Maybe you're new to investing in real estate and haven't thought about or heard of the differences between these two aspects. Well, I'm here to help! In this video, I flush out the definitions of cap rate and cash on cash return while you're investing in real estate! If you want to learn more about investing in real estate, make sure you're subscribed to this channel and follow me on social media at @BigHelperGrou
How to Invest in Real Estate if I don't have a lot of Money?
Are you looking to invest in real estate, but you don't have a lot of money to start? Without at least some money, it's going to be very difficult. But if you have a little bit to start with, you can actually start making some moves! With the right strategy, you can start to invest in real estate without a lot of money and start building your wealth through property ownership. If you want to learn more about investing in real estate, make sure you're subscribed to this channel and follow me on Instagram a
Lesson 1 - Master the Market with Merrill
My name is Merrill and I love real estate! (I can't help but hear the sing-song reply "Hiii Merrilllll" in my head when I say that, haha!) Not only do I love the confidence and security that comes with owning a home, but the financial freedom it can give you is what blows my mind! It never ceases to amaze me how lucrative real estate investing can be, even for average Joes and Janes like us. Since this is my first video, I just wanted to cover the cold hard FACTS about why real estate is the best long-ter
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Post a Comment