I once had a conversation with an investor who was looking into rental properties in Glenview. They mentioned that based on the ratio of monthly rent to purchase price, they thought a yield of around 5 percent was decent. However, when they calculated the actual cash flow, it turned out to be quite different from their expectations. It seemed they were viewing the cap rate and cash-on-cash return as the same concept. Recently, there have been many cases where investors confuse these two metrics when making decisions. It can be helpful to clarify what each of these indicators actually measures.

First, looking at the overall return, the median sale price in Glenview over the last three months is around $828,000, and single-family home rents are around $3,350 per month. Dividing the annual rental income of $40,200 by the purchase price gives a total return of about 4.9 percent. While this number may seem reasonable at first glance, it has the limitation of not reflecting operating expenses at all.

When we move to the cap rate, the picture changes. In Cook County, where Glenview is located, the median effective property tax rate for this area is about 2.10 percent, meaning that for a home priced at $828,000, the annual property tax alone is around $17,000. When you add in insurance, maintenance costs, vacancy losses, and management fees, the net operating income often drops to about half of the total income. Applying the 50 percent rule for rough calculations, the net operating income would be just over $20,000 annually, and the cap rate would fall to about 2.4 percent. This results in nearly a twofold difference between the total return and the cap rate.

The cash-on-cash return takes it a step further. Since it is calculated based on the actual cash invested, including down payment and closing costs, the numbers can differ significantly from the cap rate depending on loan terms. Even for the same property, the cash-on-cash return can be higher or lower than the cap rate based on interest rates and loan ratios. Therefore, it is essential to look at all three metrics side by side to make informed investment decisions.

When applying the 1 percent rule, the flow becomes clearer. For a property priced at $828,000 to meet this standard, the monthly rent would need to be at least $8,280, but the actual rent of $3,350 falls short of this benchmark. The 1 percent rule is not an absolute standard but a quick heuristic for assessing cash flow potential. However, in high-priced school district areas like Glenview, it can be helpful to know that most properties do not meet this criterion.

That said, this does not mean that investing in Glenview is unattractive. Areas with low cap rates often have consistent appreciation in property values, and when you factor in the increase in asset value as the loan principal is paid down and the tax benefits from depreciation, the overall return can present a different picture than what is suggested by the cap rate alone. However, since property values do not always increase, it is important to consider this aspect as a risk rather than an expectation.

Glenview is known for its stable rental demand, particularly among Korean families seeking good school districts. However, the property tax burden is relatively high compared to nearby areas, so if you overlook this aspect in your net income calculations, you may end up with an overly optimistic picture. Even when compared to nearby areas like Northbrook or Wilmette, the property tax rates often do not differ significantly, so it is more practical to compare property taxes and rental demand together rather than solely focusing on school districts.

• Total Return = Annual Rental Income / Purchase Price x 100
• Cap Rate = Annual Net Operating Income / Purchase Price x 100
• Cash-on-Cash Return = Annual Pre-Tax Cash Flow / Actual Cash Invested x 100

When reviewing investments, it can be helpful to calculate each of these three metrics separately and understand why the differences exist. Tax and rental regulations can vary by county and township, so be sure to verify property tax and school district information based on the specific property address before making a purchase. This article is not investment or legal advice, and consulting with real estate and accounting professionals before finalizing any contracts is advisable.