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NOI, Cap Rate, Cash on Cash, IRR, NPV… Explained

NOI, Cap Rate and Cash on Cash explained

Davide Pio – SSIM, LEED AP- explains how to calculate Net Operating Income (NOI) Cap Rate and Cash on Cash

Net Operation Income (NOI) is a calculation used to analyze real estate investments that generate income. NOI equals all revenue from the property minus all reasonably necessary operating expenses. Aside from rent, a property might also generate revenue from parking and service fees, like vending and laundry machines. Operating Expenses are those required to run and maintain the building and its grounds, such as insurance property management fees, utilities, property taxes, repairs and janitorial fees. NOI is a before-tax figure; it also excludes principal and interest payments on loans, capital expenditures, depreciation and amortization

NOI = Income – expenses

The capitalization rate is the rate of return on a real estate investment property based on the income that the property is expected to generate. The capitalization rate is used to estimate the investor’s potential return on his or her investment.

Cap Rate = NOI / Sales Price

A rate of return often used in real estate transactions. The calculation determines the cash income on the cash invested. Calculated as:

Cash on Cash Return = Annual Cash Flow / Down Payment

Internal Rate of Return & Net Present Value Explained

Davide Pio – CCIM, LEED AP – Explains in Part 2 the Internal Rate of Return (IRR) & Net Present Value (NPV)

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project

Internal rate of return (IRR) is a metric used in capital budgeting measuring the profitability of potential investments. IRR is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does.
Generally speaking, the higher a project’s internal rate of return, the more desirable it is to undertake the project. IRR is uniform for investments of varying types and, as such, IRR can be used to rank multiple prospective projects a firm is considering on a relatively even basis. Assuming the costs of investment are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.