A rate of return on a real estate investment property based on the expected income that the property will generate. Capitalization rate is used to estimate the investor's potential return on his or her investment. This is done by dividing the income the property will generate (after fixed costs and variable costs) by the total value of the property.
An abbreviation for Net Operating Income. It equals all revenue from the property (including parking, laundry, etc.) minus all reasonably necessary operating expenses. Operating expenses are those required to run and maintain the building and its grounds, such as insurance, property management fees, utilities, property taxes, repairs and janitorial fees. NOI is a before-tax figure; it also excludes principal and interest payments on loans, capital expenditures, depreciation and amortization.
Cash on Cash Return
Cash on cash return is the ratio of annual before-tax income to the total amount of cash invested. For example, when you purchase a rental property, you might put down only 10% for a cash down payment. Cash-on-cash return would measure the annual return you made on the property in relation to the down payment.
An abbreviation for Gross Rent Multiplier. It is a rough measure of the value of an investment property that is obtained by dividing the property's sale price by its gross annual rental income. GRM is easy to calculate but isn't a very precise tool for ascertaining value. However, it is an excellent first quick value assessment tool to see if further more detailed analysis is warranted.
Debt Coverage Ratio. It is a ratio used by bank loan officers in determining income property loans. It is calculated by dividing the property's annual net operating income (NOI) by the property's annual debt service. This ratio should ideally be over 1. That would mean the property is generating enough income to pay its debt obligations.