Rate of Return

Rate of return is the gain or loss on an investment over a period, expressed as a percentage of the amount invested. Real estate has several versions: gross yield, cap rate, cash on cash return and internal rate of return. A gross rent multiplier is not a return itself, but its inverse is the simplest one.

The versions differ in what they include. Gross yield, 1 divided by GRM, counts rent only. Cap rate subtracts operating expenses. Cash on cash return subtracts the mortgage payment and divides by the cash invested. Internal rate of return adds appreciation and the sale over the full holding period.

Each step down that list removes a simplification and adds a forecast. A property with a 9.6% gross yield can have a 5.8% cap rate and a negative cash on cash return once a loan at 7.5% is added. The gross figure is where the screen starts, not where the decision ends.

Further reading: Rate of Return on Wikipedia.