Best Rates Of Return
As you probably know, cash flow is not the most important factor when it comes to analyzing the value of a property. The rate of return is more important, (also referred to as your ROI or return on investment). You should think of ROI as the amount of money you will receive in comparison to how much money you actually invested at the onset (your basis). From a mathematical perspective, that would be:
ROI = Money / Investment Basis
When thinking about ROI, it should be obvious that it will be much higher when either one, or both, of the following concepts is true:
The amount of your cash flow is going to be higher, or your Investment Basis will be much lower. As you can see, referencing the equation that we have just given. Making more money with a smaller investment makes it even better!
What is a reasonable ROI?   An example would be putting your money in a savings account with extremely high interest.  Your return (which would be your interest rate in this particular scenario) would be 5%. Mathematically speaking, if you are able to invest $100, you will get about five dollars back by the end of the year: In this scenario, we have an investment getting 5%. If you have a CD, 5% ROI is what you should expect. With some research, you will see that if you invest in the stock market itself, you are going to nearly double this.

What is the ROI with a property?
When looking at this, you will see that there are three numbers related to ROI that you should think about; let's examine each of these independently.
Capitalization Rate (Cap Rate)
NOI or key income value is independent when looking at financing. The ROI is independent of the buyer and details area the value is called the Cap Rate which can be calculated like this:
Cap Rate = NOI / Property Price
When looking at a financial analysis pertaining to any type of property, such as a rental property, this might be the rate. It has nothing to do with financing or the buyer and is simply an indication of how much money you will earn.
The following is the Cap Rate for the property we are discussing:
Cap Rate refers to an all cash deal where you paid for everything. This is different from cash flow. By paying all cash you are maximizing your returns, and the Cap Rate isn't the highest amount of return you can get. The Cap Rate refers to how much you invested for the full price of the property itself, and in our discussions of ROI, the investment amount will actually be reduced.
When it comes to looking at Cap Rates, which one is best? It depends on the location of country you are in and also the maximum Cap Rate which could be as high as 12%. When looking at a single family homes or other similar properties, the value of this investment, in regard to the Cap Rate, is found by looking at the other properties. On average, the Cap Rate is about 10%, which means you should be searching for a property that can generate 10% (of course excluding any other considerations and situations that may arise) which is most definitely a much better investment when compared to a simple savings account with a lower interest rate which makes this a much better investment to consider when you are using your money.

Continued in next blog article...