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What is OAR and how does it apply to Real Estate Investments?
On the surface, no difference exists between Overall Rate of Return (OAR) and Capitalization Rates. However, OAR differs from capitalization rates when it comes to the appropriate and accurate application of these terms. Understanding the differences between these terms requires a brief examination of their meanings and applications.
OAR denotes an overall rate of return, also known as Overall Capitalization Rate. The term relates specifically to real estate and displays a ratio demonstrating the rate at which the income made from a property reaches its purchase price.
To calculate OAR, divide the Property Purchase Price by the Net Operating Income.
- $550,000 = Property Price
- $50,000 = Net Operating Income
- $550,000 / $50,000 = 11 OAR
Because 50,000 divides into 550,000 11 times, the income earned from a property eclipses the price of the property after 11 years
In real estate, the Capitalization Rate compares the income earned on a property, each year, to the purchase price of the property.
- $550,000 = Property Price
- $50,000 = Net Operating Income
- 50,000 / 550,000 = 9% Cap Rate
The bottom line:
– The lower the Overall Rate of Return (OAR), the better the investment.
– The Higher the Capitalization Rate, the better the investment.
