Cash Flow Vs. Cap Rate

Two Different Questions
Cash flow and cap rate describe different parts of a rental investment. Cash flow asks what remains after the modeled costs and loan payments. Cap rate compares annual net operating income with a property's value, price, or cost. Always check which denominator is being used.

Start With Operating Income
In this illustrative example, effective monthly income after vacancy is two thousand eight hundred fifty dollars. Operating costs are eight hundred fifty dollars. That leaves two thousand dollars of monthly net operating income, or twenty-four thousand dollars annually, before capital reserves and loan payments.

Compare The Two Results
Set aside one hundred dollars a month for capital reserves. With a fourteen hundred dollar monthly loan payment, projected cash flow is five hundred dollars a month. Twenty-four thousand dollars of annual net operating income divided by a four hundred thousand dollar price gives a six percent cap rate. Financing changes cash flow, while that cap-rate calculation stays the same if income, expenses, and price stay fixed.

Read The Labels Carefully
In Residential Rental Analysis, ProformaPilot shows cap rates on purchase price and total project cost. Both are before capital reserves and financing. Cash flow includes both. Advertised cap rates may use different expense assumptions. Compare the inputs, test your financing, and use the glossary when a term is unfamiliar.