Rate of Return

Rate of return states an investment's profit or loss for a stretch of time as a percentage of the starting stake. For property, the simplest version is the cap rate: NOI divided by price, the unleveraged income return in the first year.

With no loan, the default house returns 5.78% a year from income alone: $28,892 of NOI against the $500,000 price. Add appreciation and the total return rises. Add a loan and the return on the owner's cash changes, up or down depending on the loan's cost.

Investors use several rates of return that answer different questions. Cap rate measures the property. Cash on cash return measures the first year's cash to the owner. IRR measures the whole hold, sale included. All of them start from NOI.