Capitalization Rate

Cap rate expresses a year of net operating income as a percentage of what the property is worth. BRRRR investors use it two ways: cap rate on the after-repair value shows what the finished rental earns at market price, and cap rate on total cost shows what they actually earn on what they paid.

On the default deal, net operating income of about $32,600 against the $500,000 after-repair value is a 6.5% cap rate. Against the $391,350 total project cost, it is about 8.3%. That gap is the value the investor bought and built instead of paying for.

Cap rate leaves out financing entirely. Once the new loan is in place, its payment takes a large bite of that income. What the investor actually keeps shows up in monthly cash flow and the cash on cash return.

Further reading: Capitalization Rate on Wikipedia.