lately, we had many discussions on CAP Rate, what is a good CAP Rate, of course, higher the better, but CAP is not GOD, as a good RE investor, one should also look at two other ratio numbers, debt service coverage ratio and cash on cash return.
by definition, CAP = Net Income / purchase price, please remember, its does not take in consideration of debt service, so sometimes high CAP does not translate into good investment, such as a great CAP but can't keep up with mortgage payment..
debt service coverage ratio = Net Income / annual debt service, usually bank wants minimum of a 1.1 ratio before they even consider a loan, I would consider a 1.4 ration as a good investment. but again, people can argue that you can always buy down the loan, to make it look good on the book, so we should also look at cash on cash return.
cash on cash return = (net income - debt service) / total dollar invested. CCR is one of the most important ratio to look at, it tells you how you dollar is perform compare to other form of investment, such as CD, for example, if you have a net cash flow of 5k a year from a property cost 100k, if you pay cash, your return is 5%, but if you leverage it at 20% down, your return is now 5k/20k, which be 25%.
haha, there are few other ratio numbers also important, such as IRR, MIRR, they are just too complicate for my small brain....
by definition, CAP = Net Income / purchase price, please remember, its does not take in consideration of debt service, so sometimes high CAP does not translate into good investment, such as a great CAP but can't keep up with mortgage payment..
debt service coverage ratio = Net Income / annual debt service, usually bank wants minimum of a 1.1 ratio before they even consider a loan, I would consider a 1.4 ration as a good investment. but again, people can argue that you can always buy down the loan, to make it look good on the book, so we should also look at cash on cash return.
cash on cash return = (net income - debt service) / total dollar invested. CCR is one of the most important ratio to look at, it tells you how you dollar is perform compare to other form of investment, such as CD, for example, if you have a net cash flow of 5k a year from a property cost 100k, if you pay cash, your return is 5%, but if you leverage it at 20% down, your return is now 5k/20k, which be 25%.
haha, there are few other ratio numbers also important, such as IRR, MIRR, they are just too complicate for my small brain....
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