I find that many investors are confused by the distinction between cap rate or cash-on/cash return. Let me clarify... they don't have to be the same. The cap rate can match your cash/on-cash return, but that is only if the property is purchased without financing.
The riskier an investment is, the higher the caprate. A high cap rate indicates that your asset price will be low. This usually means you are making a higher risk investment. Because they can vary widely, you should always compare them to the market cap rate in your area.
The mortgage expense is not included in the cap rate. This is because it doesn't factor in financing terms, interest rates or any other considerations. This is how it concentrates on the property without all the distractions that come with financing.
Proceed with caution. If you can't bear to take excessive risk, a property that has a high cap rate may not be the best choice for you.
The most important resource we have is our time. To understand how your properties perform, you should bring in automation. Automated income and expense track will, for example help you quickly calculate NOI. It also allows you more accurately to calculate cap rates in the market.
The question becomes, "How can I tell if my investment is performing?" Although there are many ways to see your overall investment performance, it is important that sophisticated investors automate as much as possible.
It doesn't matter how wealthy you are, the cap rates of properties will stay the same, so it is easy to measure your profit potential. If you're serious in building wealth, then cap rate will be a crucial metric.
