Key Terms for Real Estate Investments
Capitalization rate: Often just called the cap rate, this is the rate of return on a real estate investment property based on the income that the property is expected to generate. The cap rate is used to estimate the investor’s potential return on his or her investment. Cash-on-cash return: This measures the annual before-tax cash flow divided by total cash invested.
The cash-on-cash return is used to evaluate the cash flow from income-producing assets. It is also sometimes used to determine if a property is underpriced. The initial equity investment is the total purchase price minus any loan proceeds.