Cap Rate vs. IRR
Cap Rate (Capitalization Rate)
- Ratio between the net operating income (NOI) produced by a property and its capital cost (purchase price or current market value);
- Does not take into account financing factors or changes in income or costs;
- Useful, “snapshot” way to compare different investments;
- Ideal for gauging the income potential of a single-tenant property with a long-term, triple-net lease.
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IRR (Internal Rate of Return)
- Annualized effective compounded return rate;
- Makes the net present value of all cash flows (positive and negative) equal to zero;
- Captures information such as rent and cost escalations, acquisition/disposition price and costs, financing costs, etc…
- Often more accurate than a cap rate analysis;
- Ideal for properties with multiple tenants and/or lease structures other than triple-net.
Last Updated on January 5, 2014 by Ramin Seddiq