Know your lingo, know your invesment!

Both cap rate and ROI (return on investment) are crucial indicators for assessing an investment's profitability, but they are computed differently and offer distinct insights.

The capitalization rate, sometimes known as the cap rate, is a measurement of a property's return on investment based purely on its current revenue and market value. It is determined by subtracting the net operating income (NOI) from the property's current market value. The prospective return on investment from a property is calculated using the cap rate, which is presented as a percentage and does not account for financing expenses or any potential increases or decreases in property value.

The return on investment (ROI) is a more comprehensive metric that accounts for all expenses and returns related to a transaction, including financing fees, cash flows, and any changes in the property's value over time. ROI, which is typically stated as a percentage, is computed by dividing the entire profit made from an investment by the investment's starting cost.

In conclusion, ROI considers all expenses and returns connected with an investment, including financing costs and changes in property value over time, whereas cap rate focuses on the income and value of a property to assess future return.

ent (ROI) is a more comprehensive metric that accounts for all expenses and returns related to a transaction, including financing fees, cash flows, and any changes in the property's value over time. ROI, which is typically stated as a percentage, is computed by dividing the entire profit made from an investment by the investment's starting cost. In conclusion, ROI considers all expenses and returns connected with an investment, including financing costs and changes in property value over time, whereas cap rate focuses on the income and value of a property to assess future return.