By Gerald Tay (guest contributor)
In the last article, we talked about capitalization rates (cap rate), which everyone abbreviates as Net Rental Yield. Using it can be a bit tricky, because the determinant of a property’s value is the result of a certain assumed net income stream. How can an investor reconcile these two things in his head: the property value, and the cap rate?
If I bought something with an assumed prospective net income of $10,000for$1 million cash, you and I would both agree that the cap rate and my ROI on that purchase was 1%.
One of the things investors ask me about cap rates is: “Why is this the most relied upon metric for many property investors? If we’re going to end up putting DEBT on the transaction, doesn’t it make sense to look at the cash-on-cash return?”
Exactly!
Cap rates are not the only ...
