There are often cases where net operating income and pre-tax cash flow are calculated as the same. Looking at the recent market, confusion tends to occur more frequently in areas like Syracuse, where the purchase price is low, as mortgage principal and interest payments are included in the net operating income calculation, resulting in a cap rate that is much lower than it actually is.

The average home value in Syracuse is $225,918 (Zillow), and the recent average rent in Syracuse is reported to be $1,706 per month. However, there is significant variation by neighborhood, with Eastwood averaging $982 for a one-bedroom, while near downtown Armory Square, it can reach around $2,000, more than double. This article will use the average monthly rent of $1,706 for Syracuse as the basis for calculations.

The annual rental income is $20,472, and when divided by the purchase price of $225,918, the total return rate is 9.1 percent, which is among the highest in the areas examined. However, the effective property tax rate in Onondaga County is 2.59 percent, significantly higher than the national median of around 1 percent (Ownwell). The effective tax rate for the city of Syracuse is reported to be 2.61 percent, meaning that for a property listed at $226,000, the property tax alone would amount to $5,895 annually.

It is important to note that property taxes, insurance, maintenance costs, and vacancy losses are included in the net operating income calculation, but mortgage principal and interest payments are not. Net operating income is a measure of the operational profitability of the property itself, while the terms and conditions of any loans taken out are reflected in the next step, the cash-on-cash return. Using the 50 percent rule to estimate net operating income gives about $10,236 annually, resulting in a cap rate around 4.5 percent. Only after subtracting the loan principal and interest payments can we arrive at the pre-tax cash flow, which is the numerator for the cash-on-cash calculation.

If we assume a down payment of $45,184, which is 20 percent of the purchase price, and finance the remainder with a 30-year fixed-rate mortgage, the annual principal and interest payments may exceed or fall below the net operating income of $10,236, depending on the interest rate level. If the net operating income exceeds the loan payment, the cash-on-cash return will be positive; otherwise, you will need to contribute more of your own money each month. If these two metrics are treated as the same, this difference can be overlooked, especially in areas like Syracuse where the low purchase price can lead to a higher leverage ratio, making this distinction particularly important.

The effective property tax rate of 2.61 percent is also worth revisiting. Compared to the national median property tax rate of around 1 percent, Syracuse has a significantly heavier tax burden. Even if the total return rate is high at 9.1 percent, if nearly half of that is consumed by property taxes and operating costs, the actual cap rate can be reduced to half. Rather than simply assessing the market based on the purchase price, it is safer to first check the total cost structure, including property taxes. Given the significant rental variations by neighborhood, it is also important to keep in mind that the actual figures calculated may vary greatly depending on whether the property is located in Eastwood or near Armory Square. Recent market trends show that both purchase prices and rents are gradually increasing, so while the total return rate itself has not fluctuated significantly, property tax rates can be reassessed annually, making it necessary to periodically check again after purchase.

In summary, the following points are outlined:

• Total return rate: the value obtained by dividing annual rental income by the purchase price
• Cap rate: the value obtained by dividing net operating income minus operating costs, including property taxes, by the purchase price (excluding mortgage principal and interest)
• Cash-on-cash return: the value obtained by dividing pre-tax cash flow, which is net operating income minus mortgage principal and interest, by the actual cash invested

Even in areas like Syracuse where total return rates and cap rates are higher than in other regions, if the property tax rate is high, the gap can be larger than expected. Since rental prices vary significantly by neighborhood, please check the market rates for the actual property location again. This article is not investment advice, and it is advisable to consult with a real estate professional and accountant before making any actual contracts.