Key Terms for Real Es­tate In­vest­ments

Financial Planning - - SPECIAL REPORT: REAL ESTATE -

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.

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