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25 Multifamily Apartment Buildings For Sale in Greater Victoria
HOW TO CALCULATE CAP RATE FOR RENTAL PROPERTIES|PART 2
Using CAP Rates Wisely
1
Use CAP rates to quickly compare similar Rental Property Investment opportunities. Calculate and Compare CAP Rates. The cap rate basically represents the estimated percent return an investor might make on an all-cash purchase of the property. Because of this, cap rate is a good statistic to use when comparing a potential acquisition to other Rental Property investment opportunities of a similar nature. Cap rates allow quick, rough comparisons of the earning potential of Rental Property investment properties and can help you narrow down your list of choices.[6]
2
Don’t use cap rate as the sole factor when determining an investment’s health. While cap rates offer the opportunity to make quick, easy comparisons between two or more pieces of property, they’re far from the only factors you should consider. Real estate investment can be quite tricky – seemingly straightforward investments can be subject to market forces and unforeseen events beyond the scope of a simple cap rate calculation. At the very least, you’ll also want to consider the growth potential of your property’s income as well as any likely changes in the value of the property itself.[8]
For example, let’s say that you buy a piece of property for $1,000,000 and you expect to make $100,000 per year from it – this gives you a cap rate of 10%. If the local housing market changes and the value of the property increases to $1,500,000 suddenly, then you may have less-lucrative cap rate of 6.66%. In this case, it may be wise to sell the property and use the profits to make another investment. However, it is also possible that the income levels may have increased, or the expense levels may have decreased. Make sure to look into all of the factors involved when determining the cap rate.
3
Use the cap rate to justify the income level of the investment property. If you know the cap rate of properties in the area of your investment property, you can use this information to determine how much net income your property will need to generate for the investment to be “worth it”. To do this, simply multiply the property’s asking price by the cap rate of similar properties in the area to find your “recommended” net income level. Note that this is essentially solving the equation (Net income/Asking price) = cap rate for “net income”.
HOW TO CALCULATE CAP RATE FOR RENTAL PROPERTIES|PART 2
E&O
HOW TO CALCULATE A CAP RATE FOR RENTAL PROPERTIES
Real Estate Rental Property Investors rely upon a variety of types of information when negotiating for income producing properties – for instance, the desirability of the rental property’s current location and/or any prospective changes in the neighborhood are two common factors. One crucial piece of information that helps investors make their decision is called the Capitalization Rate (or “CAP Rate”). The cap rate (expressed as the ratio of the property’s net income to its purchase price) allows investors to compare properties by evaluating a rate of return on the rental investment made in the property.[1][2] If you are considering an investment property, then you may want to calculate the cap rate first and then use it to help you make your decision
Call a local Apartment Realtor to find out your local Market CAP rate for rental properties in your area.
!. Calculate the yearly gross income of the investment property. The gross income of a piece of investment property will mainly be in terms of rent rolls. In other words, when a real estate investor buys a home, s/he usually makes money from it primarily by renting it out to tenants.[3] However, this isn’t the sole possible source of income – miscellaneous income can also accrue from the property in the form of coin operated vending or washing machines, parking, etc.
2.Subtract the operating expenses associated with the rental property from the gross income. Any piece of real estate comes with operating costs. Usually, these are in the form of maintenance, insurance, taxes, utilities, vacancy costs, and property management.[4] Use accurate estimates for these numbers and subtract them from the gross income you found above. This will find the property’s net income. For example, let’s say that, after having our rental property appraised, we find that we can expect to pay $900 in property management, $450 in maintenance, $710 in taxes, and $650 in insurance per year for our rental property. 9,000 – 900 – 450 – 710 – 650 = $6,290, our property’s net income.
Note that the cap rate doesn’t account for the property’s business expenses – including the purchase costs of the property, mortgage payments, fees, etc. Since these items reflect the investor’s standing with the lender and are variable in nature, they adversely affect the neutral comparison that the cap rate is meant to deliver.
3.Divide the net income by the rental property purchase price. The cap rate is the ratio between the net income of the property and its original price or capital cost. Cap Rate is expressed as a percentage.[5]
Let’s assume we purchased our rental property for $40,000. Given this information, we now have everything we need to know to find our cap rate. See below:
HOW TO CALCULATE A CAP RATE FOR RENTAL PROPERTIES
