Many professional investors prefer to use the levered cash on cash return to evaluate a property, rather than the cap rate. This takes into account the size of your downpayment as well as the rate and terms of the mortgage on the property. For example, if you have a $200K property, you put 25% ($50K) down, your NOI is $11K, and you get a 3% 30 year mortgage with P&I payments of $10,204 per year, then you can calculate your levered cash on cash return. You take your NOI and subtract the costs of the mortgage. That means you’ll clear $796 per year. On your $50K investment, that’s a levered cash on cash return of 1.6%. Doesn’t sound so good does it? Yes, part of that payment goes to principal ($4203 that first year), which would increase your total levered return to about 10% a year, and you get some of that rent tax free thanks to depreciation, and the property might even appreciate (which is awesome when you’re highly leveraged, but remember that leverage works in both directions), but your cash on cash return is still pretty pathetic.
https://www.whitecoatinvestor.com/would-my-house-be-a-good-i...