Clarification on CAP and ROI Calcs

[Doug Haisten]

I did a search of past posts on these numbers but the calculations used general terms such as "Annual Income" and "Sales Price". I hope I am not carrying this to the Nth degree, but I have a question or two to clarify the calculation of CAP for a all cash purchase. I have a question about ROI too.

If CAP is the NOI / Sales Price of the property, what constitutes the Sales Price. For instance, if I buy a property for $80K but it needs $20K in repairs and 4 months of carrying costs and $10K in sales costs , would the total of these be used for the sales price?

If ROI is After Tax Cash Flow / Total Investment wouldnt that really be NOI / (Purchase Price+Repairs+Carrying Costs+Sales Costs).

Thank Everyone

[Jon Holdman]

Why do you want to know? That's not a trick question. Typically, CAP rates are used when selling properties. So, the selling price is just that - the price for the actual sales transaction.

ROI is annual return / total cash invested. Just like you went to the bank and plunked that cash into a CD. So, for an all cash purchase, your forumla is almost accurate. Almost because you equate NOI to after tax cash flow. That's not correct because you'll have tax (positive or negative) applied to the NOI to get to after tax cash flow. NOI for an all cash purchase would accurately equate to before tax cash flow. After tax cash flow isn't really meaningful for comparing deals, since your personal tax situation has a large effect. Nevertheless, it is important to understand how much cash you end up with in your pocket.