What does the Free and Clear Return measure in real estate?

The Free and Clear Return specifically measures the net operating income (NOI) as a percentage of the total purchase price of a real estate investment. This metric is key for investors evaluating the profitability of a property without considering any financing costs like mortgage interest. By focusing on the NOI—representing the income generated by the property after operating expenses—it allows investors to gauge the return relative to their investment cost.

This is particularly useful in assessing how well the property performs in generating income. An understanding of this metric can provide insight into whether the property is a good investment based on the income it generates compared to the initial cost. Other options, such as net profit after all expenses or annual rental income, do not directly reflect this ratio in relation to the purchase price, making the first option the most applicable measure for evaluating a Free and Clear Return in real estate.