ROI, cap rate and cash flow explained

Gross yield is the annual rent divided by the purchase price. If you buy a property for US$ 100,000 and rent it out at US$ 600 a month, you collect US$ 7,200 a year: a gross yield of 7.2 %. It is quick to work out and useful for ruling deals out at a glance.

Its limitation is that it ignores costs. Two properties with the same gross yield can leave you with very different results depending on how much they cost to run.

The cap rate (capitalisation rate) uses net operating income (NOI): the annual rent less the cost of operating the property — service charges, property tax, insurance, maintenance, vacancy — with financing left out. The cap rate is that NOI divided by the price.

Continuing the example: subtract US$ 1,700 of annual costs from the US$ 7,200 of rent and the NOI is US$ 5,500, giving a cap rate of 5.5 %. The cap rate lets you compare properties as if they were all bought in cash, isolating the quality of the asset from how you finance it.

Cash flow is the money left each month after paying everything, the mortgage instalment included. If the property generates US$ 458 of monthly NOI and the mortgage payment is US$ 520, your cash flow is negative: you put in US$ 62 a month out of your own pocket.

Negative cash flow is not always bad if you expect appreciation and are paying down debt, but you need to know it in advance. Many first-time investors look only at gross yield and are caught out when the instalment eats the rent.

ROI (return on investment) measures the gain against the capital you actually invested, not against the total price. If you bought with a US$ 30,000 deposit and earned US$ 3,600 in a year between cash flow and principal repayment, your ROI is 12 %.

With leverage — debt — ROI can be far higher than the cap rate, because your gain is measured against a smaller slice of your own capital. Leverage amplifies losses just as much as gains, which is why it pays to model several scenarios before buying.

No single metric is enough. Gross yield filters, the cap rate compares asset quality, cash flow tells you whether you can carry the investment month to month, and ROI measures the real return on your capital. Read together, they give an honest picture of the deal.

The ParaguayInmo investment calculator computes all four at once from the price, the rent and your cost and financing assumptions, and shows you the year-by-year projection.