<h2>What is it?</h2><p>The capitalization rate, also known as cap rate, is one of the most widely touted metrics in real estate investing. It is essentially the net operating income of an investment property divided by the asset's value. It was adopted as a way to compare investment opportunities without consideration for how they are financed. Cap rate represents the un-leveraged rate of return of an asset over one year.</p><h2>Why is it important?</h2> <p>Capitalization rate by itself should not be used as a sole measure of investment worthiness. A more holistic view of the investment property is required to determine if it is suitable for an individual's investment objectives. However, all else being equal in two different assets, the cap rate is a good metric to differentiate between the two and select one to invest in.</p> <h2>How it is calculated?</h2><p>Simply put, the capitalization rate is determined by calculating the net operating income of an asset (NOI), revenue less operating expenses, and dividing it by the market value of the asset (many times the purchase price in real estate). The mathematical expression is as follows.</p><img class="w-100 mb-2" src="https://peerinvest-app-dev-static-assets.s3.amazonaws.com/home/knowledge-center/Cap+Rate+Equation.png" /><h3>Rental Property Example</h3><p>First, we need to calculate the net operating income of the property which equates to rental revenue less all operating expenses.</p><img class="w-100 mb-2" src="https://peerinvest-app-dev-static-assets.s3.amazonaws.com/home/knowledge-center/Cap+Rate+Example.png" /><p>Next, we take the net operating income calculated in step one and divide it by the purchase price (or current market value) to get the cap rate of the property.</p><img class="w-100 mb-3" src="https://peerinvest-app-dev-static-assets.s3.amazonaws.com/home/knowledge-center/NOI+Example.png" /><p>This exercise can be replicated across many properties and used to compare expected returns. The higher the capitalization rate, the higher the expected return of the property.</p> <p>As always, feel free to reach out to us at <a href="mailto:support@peerinvest.io">support@peerinvest.io</a>. We believe in education and ensuring all our investors have the knowledge and information required to make informed investment decisions.</p>

Learn more about capitalization rate and how it applies to investing in rental properties

Capitalization Rate

<h2>What is it?</h2><p>In a previous post, we discussed capitalization rate, cash on cash (CoC) return is a similar metric in the sense that it is a good indicator of the return potential of the asset. The difference between cap rate and cash on cash returns is the financing used to acquire the asset. Most importantly, the way to think of CoC is as distributable cash flow or cash provided by operations that PeerInvest can payout to investors as a dividend. Another key distinction is that the basis for capitalization rate is the property value or purchase price, however for cash on cash return it is the cash required to purchase the property. In many cases, this is equal to a down payment plus closing costs.</p><h2>Why is it important?</h2><p>There are three forms of returns for shareholders of a PeerInvest property. Appreciation, debt paydown, and cash flow (or dividend). Cash on cash return determines the dividend paid out each quarter and is the realizable return for each calendar year as other forms require a liquidation of the property to realize.</p><h2>How it is calculated?</h2><p>Similar to the capitalization rate, to calculate the cash of cash returns of a property one must start by calculating net operating income (NOI), then subtract debt payments, and divide by the cash required to close on the acquisition.</p><img class="w-100 my-3" src="https://peerinvest-app-prod-static-assets.s3.amazonaws.com/home/knowledge-center/Cash+on+Cash+Equation.png" /><h3>Rental Property Example</h3><p>First, we start by calculating the NOI of the property.</p><img class="w-100 my-3" src="https://peerinvest-app-prod-static-assets.s3.amazonaws.com/home/knowledge-center/NOI+Example.png" /><p>Next, we calculate cash flow by subtracting debt payments. If purchased with a mortgage, this is the monthly mortgage payment multiplied by 12 and in the case of an all-cash purchase, the debt payments are 0.</p><img class="w-100  my-3" src="https://peerinvest-app-prod-static-assets.s3.amazonaws.com/home/knowledge-center/Cash+Flow+Example.png" /><p>Lastly, divide cash flow by the cash required to acquire the property.</p><img class="w-100  my-3" src="https://peerinvest-app-prod-static-assets.s3.amazonaws.com/home/knowledge-center/Cash+on+Cash+Example.png" /><p>As always, feel free to reach out to us at <a href="mailto:support@peerinvest.io">support@peerinvest.io</a>. We believe in education and ensuring all our investors have the knowledge and information required to make informed investment decisions.</p>

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