Key Takeaways
- NOI measures profitability; Cap Rate enables comparison.
- Amortization shifts from interest-heavy to principal-heavy over the term.
- Depreciation creates phantom losses sheltering rental income.
- Cost segregation accelerates depreciation into early years.
Buy-and-hold investing uses specific vocabulary and metrics for evaluating acquisitions, managing portfolios, and communicating with lenders.
Process Flow
Operating Vocabulary
NOI = Gross Income − Operating Expenses. Cap Rate = NOI / Property Value. GRM = Price / Annual Gross Rent. Cash-on-Cash = Annual Cash Flow / Cash Invested. Vacancy Rate: budget 5-8%. Operating Expense Ratio: typically 35-50%.
| Metric | Formula | Range | Use |
|---|---|---|---|
| NOI | Gross − OpEx | Varies | Property profitability |
| Cap Rate | NOI / Value × 100 | 4-10% | Compare properties |
| GRM | Price / Annual Rent | 8-15x | Quick screening |
| Cash-on-Cash | Cash Flow / Cash Invested | 5-12% | Return on capital |
| Vacancy | Vacant / 365 × 100 | 5-8% | Income projection |
| OpEx Ratio | Expenses / Income × 100 | 35-50% | Efficiency |
Key buy-and-hold metrics
Amortization and Equity
On a $160K loan at 7%, Year 1 pays ~$2,400 principal; Year 10 pays ~$3,800. Total 10-year paydown: ~$31,200. Early payments are 83% interest / 17% principal.
Depreciation and Tax Benefits
Residential: 27.5 years. Only building value (not land). $200K property with $160K building: $5,818/year depreciation. At 24% bracket: $1,396/year tax savings. Cost segregation accelerates deductions.
Key Takeaways
- ✓NOI measures profitability; Cap Rate enables comparison.
- ✓Amortization shifts from interest-heavy to principal-heavy over the term.
- ✓Depreciation creates phantom losses sheltering rental income.
- ✓Cost segregation accelerates depreciation into early years.
Sources
- NCREIF — Property Index Returns(2025-01-15)
- Zillow Research — Rental Market Analysis(2025-01-15)
Common Mistakes to Avoid
Using gross rent multiplier as the sole evaluation metric
Consequence: Missing critical expense variations between properties
Correction: Always calculate NOI, cap rate, and cash-on-cash return for complete analysis.
Failing to include all operating expenses in NOI
Consequence: Overstating returns by 20-40%
Correction: Include vacancy (5-10%), maintenance (8-12%), management (8-10%), insurance, taxes, and reserves.
Test Your Knowledge
1.What is Net Operating Income (NOI)?
2.What is a good cap rate for residential buy and hold?
3.How is cash-on-cash return calculated?