What is NOI (Net Operating Income)?
NOI, or Net Operating Income, is the profit made from real estate investments after covering basic operational costs. It is crucial for evaluating the property’s profitability.
Example: Consider a rental property that generates $120,000 in annual rental income. If the operating expenses (maintenance, property management, insurance, etc.) amount to $40,000, the NOI would be $120,000 – $40,000 = $80,000.
Understanding Cap Rate (Capitalization Rate)
Cap Rate is a metric used to determine the return on investment for a property, calculated as NOI divided by the property’s market value.
Example: Using the same property with an NOI of $80,000, if its current market value is $1,000,000, the cap rate would be $80,000 / $1,000,000 = 8%.
Cash on Cash Return Explained
This metric shows the return on your actual cash investment, especially important when using borrowed funds for investment.
Example: If you purchase a $1,000,000 property with a $200,000 down payment (your cash investment) and the property generates an annual cash flow of $20,000 after all expenses and financing costs, the cash on cash return would be $20,000 / $200,000 = 10%.
Yield on Cost: Future Potential
Yield on Cost projects the future returns of a property based on its original cost and expected income after improvements.
Example: Suppose you buy a property for $800,000, and you expect to spend $200,000 on renovations. The total cost is $1,000,000. If you anticipate the property will generate $100,000 annually in NOI after renovations, the yield on cost would be $100,000 / $1,000,000 = 10%.