Difference between ROI and CAP Rate?

[Tom Henderson]

Hello Team,

I am working on updating my Annual Property Operating Data worksheet (from "Cashflow and 37 other equations you should know"). I have a CAP rate metric on there, I don't have ROI. What is the difference between the two metrics? It seems lots of investors use the terms simultaneously when, in fact, they could have totally different meanings.

Here is my thought on CAP Rate: Annual NOI)/(Purchase Price + Rehab costs).. is this right?

How would you calculate ROI?

What are your top financial metrics used when evaluating potential purchases? (I use 50% rule, and monthlyrent-to-purchase price.

[Jon Holdman]

Agree with your formula for cap rate.

ROI is based on your actual investment. If you pay cash, its that same as your cap rate. If you use financing, its not. The financing reduces both your returns and your up front investment.

ROI = annual cash flow / total up front investment