Payback Period

Payback period is the time it takes an investment's income to repay its cost. For an all-cash property purchase it is one divided by the cap rate: a 6% cap rate is a payback of about 16.7 years, an 8% cap rate 12.5 years, a 4% cap rate 25 years. It is the cap rate read as a length of time.

The measure ignores growth and the time value of money, so it is a screen rather than a return. But it makes cap rates intuitive. A 3% cap rate means 33 years of net income to recover the price; a 10% cap rate means ten. Buyers accepting a 33-year payback are counting on appreciation to shorten it.

Gross rent multiplier is a payback period on gross rent instead of NOI: a GRM of 10 is ten years of rent to equal the price. Because expenses are excluded, the GRM payback is always shorter than the cap rate payback for the same property, roughly six years shorter under typical expense ratios.

Further reading: Payback Period on Wikipedia.