Investors and those looking to become investors need to know what makes a good real estate deal. There are three ways to look at your returns: Cap rate, levered return and tax-adjusted levered return.
The cap rate or Capitalization Rate is a percentage found by dividing the Net Operating Income by the Current Market Value.
The levered return is the return you make when factoring debt service. You can take out a mortgage to offset. Your levered return is the free cash flow divided by the cost to acquire the real estate.
The tax-adjusted levered return factors in the taxes and property depreciation. The tax-adjusted free cash flow divided by the cost to acquire yields the tax-adjusted levered return.