Capitalization Rate = Net Operating Income / Property Value
Capitalization rate is a real estate valuation measure used to compare different real estate investments. Although there are many variations, a cap rate is often calculated as the ratio between the net operating income produced by an asset and the original capital cost or alternatively its current market value.
More about Cap Rate:
- The 2019 Real Estate Investor’s guide to understanding Cap Rate
- The Beginner’s Guide to the Cap Rate Calculation in Real Estate
- Cap Rate Explained (And Why it matters with Rental Properties)
Cash on Cash (CoC)
CoC = Levered Cash Flow / Cash need
In investing, the cash-on-cash return is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage. It is often used to evaluate the cash flow from income-producing assets. Generally considered a quick napkin test to determine if the asset qualifies for further review and analysis. Cash on Cash analyses are generally used by investors looking for properties where cash flow is paramount, however, some use it to determine if a property is undervalued, indicating instant equity in a property.
More about Cash on Cash:
- What is a good Cash on Cash return?
- How to Calculate Cash on Cash return?
- Cash on Cash return: the most important calculation in Investing?
- Cash on Cash return: what it is and why it is important in real estate
Internal Rate of Return (IRR)
Internal rate of return is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. Internal rate of return is used to evaluate the attractiveness of a project or investment. IRR is by far the most commonly used and more useful financial ratio. A lot of people only swear by Cap Rate and Cash on Cash because they are quick to calculate but they only provide one side of the investment. IRR, on the contrary, provides a more complete picture of an investment by taking into account all aspects of an investment: leverage, property appreciation, inflation, cash flow, debt repayment, etc..
This ratio can’t be calculated manually but it is easily done with Excel. More on IRR:
- Become an expert on IRR in real estate investing
- What is IRR and how does it work?
- Why IRR matters: evaluating real estate investment returns
- What IRR can tell investors about real estate investments
Modified Internal Rate of Return (MIRR)
The modified internal rate of return (MIRR) assumes that positive cash flows are reinvested at the firm’s cost of capital and that the initial outlays are financed at the firm’s financing cost. By contrast, the traditional internal rate of return (IRR) assumes the cash flows from a project are reinvested at the IRR itself. The MIRR, therefore, more accurately reflects the cost and profitability of a project.
Similarly to the IRR, the MIRR cannot be calculated manually but this can be done in Excel. More about MIRR:
Equity Multiple (EMx)
Equity Multiple = (Total Profit + Max. Equity Invested) / (Max. Equity Invested)
The Equity Multiple of an investment is a ratio used to help understand total cash return over the life of an investment. The ratio is equity to total net profit plus the total equity invested divided by the total equity invested.
More about EMx: