What is the Difference Between Cap Rate and ROI in Real Estate?

What is the Difference Between Cap Rate and ROI in Real Estate?

The difference between Cap Rate (Capitalization Rate) and ROI (Return on Investment) in real estate lies in how they measure profitability and account for investment costs. Cap Rate is used to evaluate the potential return on a real estate investment based on the income the property is expected to generate, calculated as the Net Operating Income (NOI) divided by the property's current market value, focusing solely on the property's income potential without considering financing or capital costs. ROI, on the other hand, measures the total return of an investment relative to the initial investment cost, including all expenses and financing costs, providing a more comprehensive view of an investor's actual or anticipated return.

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