ROI ???

Ok, you are getting the two mixed up it sounds like. I will show you cap rate if you are renting the above house:
Buy for 20k
Repairs are 5k = 25k investment
Rented for 550
taxes/ ins/ misc = 100
450 net times 12= 5400net per year
5400 divided by your investment 25,000= .216 cap rate or a 21.6% roi per year

If you flip it it would be off the sales price:
25k div by 40k =.625 or 62.5% roi
The less time it takes to flip the higher the roi because of time (yearly/monthly). Hope I helped... NOW GO GET SOME

So you are saying Cap Rate is the same as ROI. I thought they were 2 different items.

ROI = return on the capital invested.

Cap Rate = the rate of return based on full cash purchase.

Your example #2 is incorrect because it does not include the cost of the 15K loan.

Cap Rate = Capitalization Rate = Annual ROI = Annual Return on Investment

They are all the same thing! Just different terms. Keith is right, typically ROI is a term used in profit from flips, and cap rate is used when dealing with cashflow in rentals. Cap rate is assumed to be an annual calculation, and ROI is assumed to be a total and final calculation.

Cap Rate only works with properties bought with cash that have no mortgage. If you think about it, when you buy a property with cash, then refinance it, and get all of your money back plus more from the refinance, there CAN'T be a cap rate because you just got your entire investment back through the loan. You would only be concerned about cashflow at that point. But also don't forget to include mortgage payments in your monthly expenses if you refinance!

Cap Rate is calculated by ANNUAL CASHFLOW divided by the SUM OF ALL COSTS to purchase and rehab the property.

Example:

Purchase Price = 80k
Closing Costs = 2k
Rehab = 18k

TOTAL COSTS = 100k

Rent = 1,300/mo
Taxes = 100/mo
Insurance = 50/mo
Maintenance = 50/mo
Management = 100/mo

TOTAL CASHFLOW = 1,000/mo or 12,000/yr

12,000 divided by 100,000 = 0.12 = 12% Cap Rate

So if I understand your Example #2 correctly, assuming #1 and #2 are two different properties, then yes that would be correct because you have it partially financed (only invested 5k cash and financed the other 15k). So your CASH ON CASH RETURN (cap rate) would be 81%. If you financed the entire 20k, then there would be an infinite cap rate because you have no cash invested.

But if they are the same property, then how can they cashflow the same amount if one has mortgage payments and the other one doesnt?

Another way to look at it would be "If I invested 50k cash, and that investment earned me 10k per year, I would have a 20% cap rate"

Or you can also look at it as "If I invested 50k cash, and that investment earned me a 20% cap rate, I would earn my entire 50k investment back in 5 years.

Example #2 was a tricky one to think about. But if he only has 5k cash invested, then why would he need to include the cost of the 15k loan? That's not his money, therefore he can't get a return on it. He could only get a return on his cash. So if he's getting 4k/yr and only invested 5k, I would think his 80% cap rate calculation would be right.

But I agree with you by him not including the cost of the 15k loan. If the two examples were for the same property, then there is no way the annual net cashflow can be the same on each example. The one with a 15k loan will cashflow less because of the mortgage payments.

AAAAAHHHHHH It is starting to click now. Thank you Dominic, Donna and Keith.

I think I have it now.

ROI is used when selling the house.

Cap rate is used when renting a house showing the yearly cash flow in a percentage form.

So if I have a house with a renter in place, I would adverise it to an investor showing the cap rate.

When I sell a house, I would use the ROI so I know what kind of return I recieved on my Total investment.

So when I see wholesalers selling a house showing a 28% ROI, there showing how much ROI they are makeing on their investment.????

If a wholesaler is saying there's a 28% ROI, they are probably advertising what the end buyer can make from the deal. Wholesalers don't make ROI because they have no cash invested, they just connect buyers and sellers for an assignment fee or they do a double close.

I am just as confused about all this as I was before I started this thread. When I get home, I calling my Coach to get this straight.