Evaluating a real estate investment requires looking beyond just the monthly rent. Professional investors use specific metrics to determine if a property is a "good deal" compared to other investment vehicles like stocks or bonds.
Key Metrics Explained
1. Net Operating Income (NOI): This is the total income generated by the property minus all necessary operating expenses (excluding mortgage payments). It represents the raw profitability of the asset itself.
2. Capitalization Rate (Cap Rate): This is calculated by dividing the NOI by the purchase price. It allows investors to compare different properties regardless of how they are financed. A higher Cap Rate typically suggests a higher return, but often comes with higher risk.
3. Cash-on-Cash Return: This is arguably the most important metric for investors using leverage (mortgages). It measures the annual cash flow relative to the actual amount of cash you "out of pocketed" (the down payment and closing costs).
Example Calculation
Imagine you buy a property for $200,000. You put down $50,000 (Total Investment). The annual rent is $24,000 ($2,000/mo), and your annual expenses for taxes and insurance are $4,000.
NOI: $24,000 – $4,000 = $20,000
Cap Rate: ($20,000 / $200,000) = 10%
Cash-on-Cash: ($20,000 / $50,000) = 40% (Note: This simple example assumes no mortgage interest for clarity).
function calculatePropertyReturn() {
var price = parseFloat(document.getElementById('purchasePrice').value);
var investment = parseFloat(document.getElementById('totalInvestment').value);
var rent = parseFloat(document.getElementById('monthlyRent').value);
var expenses = parseFloat(document.getElementById('annualExpenses').value);
if (isNaN(price) || isNaN(investment) || isNaN(rent) || isNaN(expenses) || price <= 0 || investment <= 0) {
alert("Please enter valid positive numbers for all fields.");
return;
}
var annualGrossIncome = rent * 12;
var noi = annualGrossIncome – expenses;
// Cap Rate = NOI / Purchase Price
var capRate = (noi / price) * 100;
// Cash on Cash = NOI / Total Cash Invested
// Note: In a professional setting, NOI would subtract debt service for CoC,
// but as a general rate of return calc, we use the unleveraged yield on cash.
var cashOnCash = (noi / investment) * 100;
// Gross Yield = Gross Annual Income / Purchase Price
var grossYield = (annualGrossIncome / price) * 100;
// Display Results
document.getElementById('resNOI').innerText = "$" + noi.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('resCapRate').innerText = capRate.toFixed(2) + "%";
document.getElementById('resCoC').innerText = cashOnCash.toFixed(2) + "%";
document.getElementById('resGrossYield').innerText = grossYield.toFixed(2) + "%";
document.getElementById('resultArea').style.display = 'block';
}