Cap Rates vs. IRR in Commercial Real Estate Investments

1
Cap Rates vs. IRR in Commercial Real Estate
Investments

• https//achieve-academy.net/cap-rates-vs-irr-in-co
  mmercial-real-estate-investments/

2
INDEX

• What is Cap Rate?
• How to Calculate Cap Rates
• What is IRR?
• How is IRR Calculated?
• When to Use Cap Rates vs. IRR
• Final Thought

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What is Cap Rate?

• A capitalization rate, or cap rate, is an
  annualized measure of the net operating income
  (NOI) divided by the propertys investment value.
  In other words, a cap rate tells you how much
  cash flow you can expect from a property over a
  given period of time. Its calculated by dividing
  the NOI by the purchase price

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How to Calculate Cap Rates

• Calculating a cap rate involves dividing the net
  operating income (NOI) by the purchase price,
  like so
• Cap Rate NOI / Purchase Price
• Net Operating Income NOI
• Purchase Price P
• Cap Rate NOI / P

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What is IRR?

• The Internal Rate of Return (IRR) is a measure of
  the profitability of an investment. It tells you
  what rate of return you would earn if you held
  onto that investment for one year with no
  reinvestment risk. Its calculated by solving for
  the discount rate that makes your total expected
  cash flows equal to zero.

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How is IRR Calculated?

• The internal rate of return (IRR) is a metric
  used to evaluate the profitability of an
  investment. It is calculated by discounting the
  future cash flows of a project back to the
  present day at an assumed cost of capital. The
  IRR can then be used to compare different
  investments and determine which one offers the
  highest return.
• The IRR can be calculated using the following
  equation
• IRR Net Present Value / Cost of Capital

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When to Use Cap Rates vs. IRR

• Cap rates and internal rates of return (IRR) are
  two common ways to measure the value of a real
  estate investment property. Both can be used to
  compare investments and choose the most
  profitable ones, but they measure different
  aspects of the deal.
• Cap rates and IRR are both useful metrics to
  investors. The cap rate is a measure of the
  return on investment (ROI) that you make when
  buying an asset. The IRR is the rate at which
  your investment will return the initial capital
  invested.

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Final Thought

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