Investor Return Metrics (Cap Rate, IRR and NPV)

CRE Fast Five: Hot Topics in Commercial Real Estate
Episode #42: Investor Return Metrics
Understanding Capitalization Rate (Cap Rate), Internal Rate of Return (IRR), and Net Present Value (NPV) is critical to real estate investing. Learn how these three metrics are calculated and when to use each.
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[Walina]

Cap rates do not measure "returns" and have nothing to do with leverage. If you do the math you will see that a cap rate on a property will be exactly the same if bought with cash or financed 100%. Cap rates come from an income approach to value called direct capitalization. The formula is V=i/r. The cap rate is market based. In a 10% cap rate market investors have paid $10 for each possible dollar of NOI and in a 5% cap rate market investors have paid $20 for that NOI dollar. See, it is a VALUATION metric and does not measure return. A commercial investors should know this.