Every investor seems so have a different strategy.
Some say cash flow is king because it pays the bills and keeps you investing.
Others say appreciation is where real wealth is created over long term.
In my opinion appreciation is a bonus but cash flow is the engine that keeps the ball moving, along with principal pay down. Everything else is a bonus if it comes.
I'd love to hear your thoughts and real life experiences.
1. Cap Rate: Let's start with cap rate, a metric that measures a property's income potential relative to its market value. Basicly cap rate tells you how much money a property makes compared to its price. The formula for cap rate is straightforward:
Cap Rate = (Net Operating Income / Property Value) * 100%
Imagine a property with an NOI of $50,000 and a market value of $500,000. Plugging these values into the formula and you'll find a cap rate of 10%. .
This means that for every dollar invested, you can expect a 10% return annually.
2. Rental Yield: Next up, let's delve into rental yield, which measures the return generated from rental income relative to the property's value. Basically rental yield shows how much rental income a property makes compared to its price. The formula for rental yield is:
Rental Yield=(Annual Rental Income/ Property Value)×100%
For instance, if a property generates $30,000 in annual rental income and has a market value of $600,000, the rental yield would be 5%. Plugging in the numbers:
Rental Yield=($30,000/$600,000)×100%=5%
A rental yield of 5% indicates a potential return of 5% annually based on the property's value.
3. Net Operating Income (NOI): NOI is a critical metric that provides a clear picture of a property's income potential before considering financing or taxes. The formula for NOI is:
NOI=Total Income−Operating Expenses
NOI helps you understand the property's profitability and potential cash flow.
4. Cash-on-Cash ROI: Finally, let's discuss cash-on-cash ROI, which focuses on the return generated from the cash invested in the property. Suppose you've invested $100,000 in a property and generate an annual net cash flow of $10,000. The formula for cash-on-cash ROI is:
Cash-on-Cash ROI=(Annual Net Cash Flow / Total Cash Invested)×100%
Plugging in the numbers:
Cash-on-Cash ROI=($10,000 / $100,000)×100%=10%
A cash-on-cash ROI of 10% indicates a potential return of 10% annually on your cash investment.
Happy investing!