Cap Rate, ROI, Rental Yield & IRR Explained: How Smart Property Investors Really Measure Returns

Written By chheng leang

Whether you are investing in property for passive income (rental yield, GRR, long-term holding) or active income (value-add, flipping, redevelopment), investors often ask the same core questions:

  • What is the cap rate?

  • What is the rental yield?

  • What is my return on investment (ROI)?

  • What about IRR — is it more important?

These terms are frequently used in brochures and sales pitches, but they are not interchangeable. Each measures a different aspect of investment performance. Understanding them correctly is essential for making sound decisions — especially in a market like Phnom Penh, where returns vary widely by location, product type, and strategy.

1. Rental Yield — The Starting Point for Income Investors

> What Is Rental Yield?

Rental yield measures how much rental income a property generates relative to its purchase price.

Formula: Rental Yield (%) = Annual Rental Income ÷ Purchase Price

Example (Phnom Penh Condo)

  • Purchase price: $150,000

  • Monthly rent: $900

  • Annual rent: $10,800

👉 Rental Yield = $10,800 ÷ $150,000 = 7.2%

> How to Interpret It

  • Gross rental yield (before expenses) is often used in marketing

  • Net rental yield (after management, maintenance, tax) is more realistic

  • In Phnom Penh, realistic net yields often fall between 4.5%–7%

✔ Best used for: Simple income comparison between properties

2. Capitalization Rate (Cap Rate) — Income vs Value

> What Is Cap Rate?

Cap rate measures the net operating income (NOI) of a property compared to its market value.

Formula: Cap Rate = Net Operating Income ÷ Property Value

NOI = Rental income after operating expenses, but before financing

> Example

  • Annual rent: $10,800

  • Operating expenses (management, maintenance, vacancy): $2,800

  • NOI = $8,000

  • Property value: $150,000

👉 Cap Rate = $8,000 ÷ $150,000 = 5.33%

> How to Interpret It

  • Cap rate reflects risk and income quality

  • Lower cap rate = lower risk / prime area (e.g., BKK1)

  • Higher cap rate = higher risk / emerging area

✔ Best used for: Comparing income-producing properties regardless of financing

3. Return on Investment (ROI) — Total Profit Perspective

> What Is ROI?

ROI measures the total profit made from an investment compared to the total cash invested.

Formula: ROI (%) = (Total Profit ÷ Total Investment) × 100

> Example

  • Purchase price: $150,000

  • Rental income over 3 years: $30,000

  • Selling price after 3 years: $165,000

  • Total profit = $45,000

👉 ROI = $45,000 ÷ $150,000 = 30% total ROI (≈ 10% average per year, not time-weighted)

> How to Interpret It

  • ROI is simple and intuitive

  • Does not consider time value of money

  • Does not show cash flow timing

✔ Best used for: Quick performance snapshots

4. Internal Rate of Return (IRR) — The Most Complete Metric

> What Is IRR?

IRR measures the annualized return of an investment over time, considering:

  • Cash inflows

  • Cash outflows

  • Timing of each cash flow

IRR is widely used by institutional investors, developers, and sophisticated buyers.

> Example (5-Year Holding)

  • Initial investment: –$150,000

  • Annual rental income: +$10,000 (years 1–5)

  • Sale in year 5: +$170,000

👉 IRR ≈ 8.5%–9% annually

> How to Interpret It

  • IRR accounts for when money is received

  • Best for comparing long-term investments

  • Sensitive to exit assumptions

✔ Best used for: Long-term investment planning & comparing multiple strategies

Phnom Penh Market Context

In Phnom Penh:

  • Rental Yield & Cap Rate matter most for condos and serviced apartments

  • ROI & IRR matter more for development, value-add, and long-hold investors

  • GRR projects often show artificially strong yields, but IRR reveals the real return

  • Prime locations (BKK1, Tonle Bassac) usually offer lower yields but stronger capital preservation

  • Emerging areas may show higher yields but carry higher vacancy and exit risk

Final Thoughts

No single metric tells the full story.

  • Rental yield answers: How much income will I get?

  • Cap rate answers: Is the income worth the price?

  • ROI answers: How much profit did I make?

  • IRR answers: Was this investment worth my time and risk?

A smart property investor looks at all four together, not just the highest number in a brochure.

Want help analyzing a property using real data?

I regularly help clients evaluate condos, penthouses, and investment assets using market-based yield, cap rate, and IRR analysis — not marketing figures.

Hoem Seiha, ERA Curator of Luxe Residences | ERA Cambodia

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