A property’s net operating income divided by its price or market value, expressed as a percentage. Cap rate measures the unlevered annual return of an income property, which makes it useful for comparing deals independent of how they are financed. Typical cap rates vary widely by market and property type.
Spending on major components that extend a property’s life or add value — roofs, HVAC systems, water heaters, full renovations — as opposed to routine repairs and upkeep. Investors typically budget a recurring reserve for capex even in years when nothing is replaced. Most analyses treat capex separately from operating expenses, so it sits below NOI.
The money left over after all of a property’s bills are paid from its income — operating expenses, loan payments, and reserves. Positive cash flow means the property pays for itself with margin; negative cash flow means the owner feeds it. Cash flow is the recurring return, distinct from appreciation and tax effects.
Annual pre-tax cash flow divided by the total cash actually invested — down payment, closing costs, and upfront repairs — expressed as a percentage. Unlike cap rate, cash-on-cash accounts for financing, so it shows what the investor’s own money is earning. Two identical properties can have very different cash-on-cash returns depending on the loan.
Recently sold properties similar to a subject property in location, size, age, and condition, used to estimate what the subject is worth. Appraisers, agents, and investors adjust comp prices up or down for differences before settling on a value. The quality of a valuation is only as good as the comps behind it.