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Real Estate Investing Terms You Need to Know

Real estate investment terms - today's topic Real estate investment terms - today's topic

Cash flow…cap rate…cash on cash return…

It’s enough to blow your mind, isn’t it?

We’ve put together this primer for our readers from the most common questions our Customer Service Team comes across. They work with our Investor members to define key real estate terms, help them navigate our site and find articles in our Real Estate Investing Articles library day in, day out. So today, we’re focusing on three key terms that real estate investors need to know: Cash Flow, Cap Rate and Cash on Cash Return.

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CASH FLOW

Annual Net Operating Income is also commonly referred to as Cash Flow. This represents the annual income or loss the investment property actually generates after collecting a year’s worth of rent and paying the annual expenses associated with owning and operating the property. Cash Flow is calculated by subtracting the Annual Total Operating Expenses from the Annual Gross Rental Income.

So, the formula is:

Annual Net Operating Income = Annual Gross Rental Income – Annual Total Operating Expenses

Read InvestorLoft’s expanded explanation of Cash Flow.


CAP RATE

Cap Rate is a component of return on investment for an investment property as it relates to the Purchase Price and based on the amount of Annual Net Operating Income the property will yield (not including mortgage payments or considering income tax) in proportion to the purchase price of the property.

Cap Rate is calculated by taking the Annual Net Operating Income (or Cash Flow) of the investment property and dividing it by the Purchase Price.

So, the Cap Rate formula is:

Cap Rate = Annual Net Operating Income (not including mortgage payments)/Purchase Price

Read InvestorLoft’s expanded explanation of Cap Rate.


CASH ON CASH RETURN

The Cash on Cash Return of a property is often times referred to as a property’s yield. Cash on Cash Return is a way of evaluating the return on investment of an investment property in relation to your out-of-pocket expense, based on the amount of Annual Net Operating Income the property will yield (not considering income tax) in proportion to your Down Payment and Repair Cost. The Cash on Cash Return formula is calculated by taking the Annual Net Operating Income of an investment property divided by the amount of your Down Payment and immediate Repair Cost.

So, the Cash on Cash Return formula is:

Cash on Cash Return = Annual Net Operating Income/(Down Payment + Repair Cost)

Read InvestorLoft’s expanded explanation of Cash on Cash Return.

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Tags: cap rate, cash flow, cash on cash return, Investment Property, Real Estate Investment

This entry was posted on Thursday, August 20th, 2009 at 9:27 am and is filed under Real Estate Investment News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.


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