ROI versus CAP Rate: What’s the difference?

ROI (Return on Investment) and CAP rate (Capitalization Rate) are valuable tools for determining how profitable your investment property is or will be. Though both calculations are similar, what they measure and how they are calculated are slightly different. ROI, or Return on Investment, measures the amount of return you receive on an investment relative to the cost of the investment and is displayed as a percentage. To understand how ROI is calculated, we must first understand what the terms Net Operating Income and Cash Flow are.

Net Operating Income (NOI) is the amount of profit derived from all income and expenses.

NOI = Yearly Gross Income – Yearly Gross Expenses

Cash Flow is the amount of profit derived from the Net Operating Income after mortgage payments.

Cash Flow = NOI – (Monthly Mortgage Payment x 12)

ROI is then calculated by dividing the return of an investment (cash flow), by the cost of the investment (down payment on property). In the case of real estate, ROI would be calculated as such:

ROI = Cash Flow / Down Payment

For example: