The Four Rates of Returns You Will See Most
In commercial real estate investing you will run across a lot of terms and abbreviations. We want to share the most common you will see.
A cap rate is also known as a capitalization rate. This is probably the most common real estate term you will see when looking for properties. The easiest way to define a cap rate would be the return on your investment after expenses if you had no debt on the property. It is calculated on an annual basis.
Cash on Cash
The Cash-on-Cash return (CoC) is the second most seen investment return term you will run across. Simply put, the cash-on-cash return is the return you will receive after expenses and debt on a property. Cash-on-Cash is also calculated on an annual basis.
IRR, also known as the Internal Rate of Return, is a method of analyzing returns on a real estate investment over time. IRR is calculated using such factors as initial investment, annual returns, amount of time held and amount of capital received at the sell of the sell. IRR focuses more on the annual growth rate.
ROI, also known as Return on Investment, is used to measure growth of an investment. Similar in some regards to the IRR, the focus of the ROI is the total growth from start to finish where as IRR focuses on the annual growth rate.
Different investors will look at different metrics to decide if a property is right for them to invest in. When we are looking at properties to invest in, I will typically look at the cap rate to see if it is worth investigating further. If the cap rate is good, I will move on to the cash on cash, and then look at the ROI and IRR. Distributions from a passive investment are going to be calculated on the cash on cash returns.
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