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Glossary of investment terms Cap Rate: The Cap Rate or "Capitalization Rate" is a simple tool for quickly analyzing the value of income producing property. This rate is calculated by dividing the property's Projected Net Operating Income by the List Price or sales price of the property. For example, if I buy a warehouse for $100,000 and I anticipate that it will produce $10,000 in NOI the following year, I have purchased the property at a 10% cap rate.
Cash on Cash return: This calculation measures the property's cash flow in relation to the cash investment needed to purchase. As most real estate is purchased with the help of 3rd party financing, generally only a portion of the sales price is accounted for with cash down payment. The annual cash flow produced by the property is divided by the total cash investment made on the property (this generally includes the down payment, closing costs and loan points paid by the buyer at closing). For example, if I purchase a property for $100,000 but only put $30,000 down and the cash flow after my loan payments are made is $3600 per year, I have received a 12% cash on cash return.
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