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Cap rate, gross yield, and cash-on-cash return are three different metrics that are commonly used to evaluate the performance of a real estate investment.
Cap rate, or capitalization rate, is a metric that reflects the rate of return on a real estate investment property based on the net operating income (NOI) generated by the property. It's calculated by dividing the property's NOI by its market value or purchase price, and is expressed as a percentage. Cap rate provides an estimate of the return on investment that is independent of financing and tax considerations.
A good cap rate for a single-family rental property can vary based on several factors, including the location, condition, and rental income of the property. However, as a general guideline, a cap rate of at least 6% is considered to be a good benchmark for a single-family rental property.
That said, it's important to note that a higher cap rate doesn'tt necessarily mean a better investment, as it may indicate a higher level of risk associated with the property. Conversely, a lower cap rate may indicate a lower level of risk but a lower potential return on investment. Ultimately, the ideal cap rate will depend on the your specific investment goals and risk tolerance.
Gross yield, is a measure of the property's income generation potential and is calculated by dividing the annual rental income by the property's value. It's expressed as a percentage and does not take into account any expenses associated with owning and operating the property. Gross yield provides an initial estimate of income generation potential.
A good gross yield for a single-family rental property can vary depending on several factors, including the location of the property, the condition of the property, and the local rental market (sound familiar?). But as a general rule of thumb, a gross yield of at least 8% is considered to be a good benchmark for a single-family rental property. This means that the annual rental income should be at least 8% of the property's purchase price. Of course, higher gross yields are always better, but it's important to ensure that the property is still cash flow positive after accounting for expenses such as property taxes, insurance, maintenance, and vacancy costs.
Cash-on-cash return is a metric that takes into account the actual cash invested to generate the property's return on investment. It's calculated by dividing the property's annual pre-tax cash flow by the total cash investment, including the down payment, closing costs, and any renovation expenses. Cash-on-cash return is a valuable measure of the property's profitability based on the actual cash invested.
A good cash-on-cash return for a single-family rental property can also depend on several factors, including (you guessed it) the location, condition, and purchase price of the property. However, as a general guideline, a cash-on-cash return of at least 8% is considered to be a good benchmark for a single-family rental property.
Higher cash-on-cash return is generally better, but it's also important to ensure that the property is still generating positive cash flow after accounting for all expenses, including property management, maintenance, and repairs. Additionally, the specific goals and investment strategy of the investor may impact what they consider to be a good cash-on-cash return.
All three of these metrics are vital to understanding the investment potential of a rental property, and each gives a slightly different angle on the economics. Cap rate provides an estimate of the return on investment based on the property's net operating income, while gross yield provides an estimate of income generation potential, and cash-on-cash return provides a measure of profitability based on the actual cash invested. Savvy investors look at each of these metrics in the context of their own risk profiles and goals before moving forward with deeper diligence. And Picket is here to help you every step of the way.
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