What is the difference between Cap rate and cash flow computation?

Hi,



There must be many investors here. I'm planning to buy the first investment property.

Someone suggested this calculator to me for before/after tax cap return rate computation. I tried but found it's hard to understand why I have negative cash flow but still has around 4.8% cap return rate? Can anyone help?

http://www.propertycashflowcalculator.com/index.jsp?price=450000&downpay=&closingcost=10000&apr=3.5&terms=30&propertytax=1.25&incometax=28&rental=2500&vacancy=1.2&hoa=200&insurancemaintenance=100&managementfee=0&runcalc=1



my number is $450k purchase price, down 25%, rate 3.5%, rent $2500 and HOA $200.



Thanks,
  • October 18 2012 - US
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Answers (6)

The short answer is that a Cap Rate is determined by dividing your property's annual net cash flow (without deducting your mortgage payments) by your total purchase price.    This is used to evaluate the property income only and not take into consideration how you might choose to finance your acquisition. 

Your "Pre-Tax Cash on Cash Return" on the other hand, does take your financing into consideration.  In this equation your numerator is your net annual cash flow from the property (after deducting your debt-service payments) divided by your cash down payment to acquire the property (not the total purchase price). 

You'll find that when your Cap Rate is higher than your debt service "constant" (annual loan payment divided by loan amount) the more leverage you use to buy (the greater your loan amount) the higher your cash on cash return % will go.  And the opposite is true as well - when your debt constant is higher than the property's cap rate, the more leverage you apply to the purchase the lower your cash on cash return will go.

Okay, so the answer wasn't so short......I hope it helps anyway..
  • March 21 2013
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[Promotion and hotlink removed by Zillow moderator. Please see our Good Neighbor Policy.]

  • March 21 2013
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Here's a good site for looking at numbers, metrics like these, [link removed by moderator due to self-promotional]  Easy to use and understand more importantly!
  • March 21 2013
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Wow!  Why would you want to spend $450k and only receive $2500/mo rent?  Those number just don't make financial sense.  What market is this in?

You can buy over four (4) properties with $450k and get a much higher net cash flow and cap rate.  Take a look at our properties on our website to get a better idea of what I'm talking about.

Continued success,

Marco Santarelli
Norada Real Estate Investments
.
  • October 18 2012
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What are taxes, Insurance, Management Fees, any other expenses requires to operate the property on an annual basis?

Your CAP rate will be your Gross Income - Expenses(including Interest) / Price (including acquisition costs) 
That's the easy way, but does not take into account Depreciation, and other tax benefits.

Your cash flow will be the amount of $ left over after all expenses are paid.

Give me the complete details and I'll send you a spreadsheet.  Email me directly.
  • October 18 2012
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A consistent/yearly 1.2 month vacany rate in your scenario will put a dent in your overall cashflow (and leave you negative)...but you will need to consult your tax professional with this question for an accurate answer ie to factor in depreciation, etc.

In my experience though (based on your tax rate, the property must be somewhere in California?) here in So-Cal, tenants of SFR-style property typically stay a minimum of 3-4 years before moving out.  In the apartment-style, usually the minimum is 1-2 years. This is just from my own personal property management experience of self and personal client based information.  Location and rental terms are huge factors too.  Just make sure you work with an expert to help maximize the odds of finding a prospective tenant that won't be late with the rent, etc.  

Investing in real estate can be a truely amazing experience, best of luck!

  • October 18 2012
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