Are you out of your depth? Real Estate investment metrics ROI & Cap Rates and how to apply them.

Real Estate ROI and Capitalization Rate (Cap Rate) are both essential metrics used in real estate investment analysis, however they assess different aspects of investment performance:

Return on Investment (ROI): ROI is a larger measure of the overall return earned by an investment over a set period, usually stated as a percentage.

It considers not only the property's rental income, but also its expenses, financing costs (if any), and any changes in the property's value over time.

ROI is commonly computed as [(Net Profit / Total Investment) x 100].

Net profit is calculated by deducting rental income from operational expenses, financing fees, and any other costs related with the property.

ROI provides a comprehensive assessment of an investment's profitability by accounting for a variety of factors.

Capitalization Rate (Cap Rate): Cap Rate is a more specialised indicator that focuses entirely on the income production potential of the property and its existing market value.

It is computed as (Net Operating Income / Property's Current Market Value).

Net running Income (NOI) only comprises the rental income and running expenses of the property (without financing costs and taxes).

Cap Rate is presented as a percentage and is used to assess the prospective return on a property based on current market circumstances.

It allows investors to swiftly analyse the risk and possible return of a property without taking into account financing or property value fluctuations.

In essence, ROI provides a full assessment of an investment's entire profitability, taking into account all costs and income sources, including property value fluctuations. Cap Rate, based on.

It's always necessary to know and understand how your potential investment property ratio compares to other property ratios in the local market or area. The comparison will help determine the strength and risk of your purchase. For example what does it mean if my potential investment property has a ROI of 8% or Cap Rate of 6%? Well, if your market ROI average is lower than your calculated ROI of 8% you can see that your investment would be returning a higher rate than what is expected in the local area/market and the same would apply to your Cap Rate. These ration along with a few other can give you a snapshot of what your investment looks like.

Contact us or chat with one of us to help you understand more about the Cyprus local market ratios and how the can work for you...