HOW TO CALCULATE CAP RATE FOR RENTAL PROPERTIES|PART 2

HOW TO CALCULATE CAP RATE FOR RENTAL PROPERTIES|PART 2

CAP Rates-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]

  • For example, let’s say that we’re considering buying two pieces of Rental Properties property in the same neighborhood. One has a cap rate of 8%, while the other has a cap rate of 13%. This initial comparison favors the second property. It has a higher cap rate, so it is expected to generate more money for each dollar you spend on it.[7]

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”.

  • For example, if we bought a property for $400,000 in an area where most similar properties have about an 8% cap rate, we might find our “recommended” income level by multiplying 400,000 × .08 = $32,000. This represents the amount of net income the property would need to generate per year to get an 8% cap rate. However, keep in mind that you cannot set rental rates based on the cap rate. They must be based on market rates and consider how this rental would compare to other rentals in the area.
  • Source Carla Toebe 

HOW TO CALCULATE CAP RATE FOR RENTAL PROPERTIES|PART 2

 

E&O

HOW TO CALCULATE A CAP RATE FOR RENTAL PROPERTIES

HOW TO CALCULATE A CAP RATE FOR RENTAL PROPERTIES

CAP Rates

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.

  • For example, let’s say that we’ve just purchased a house we intend to rent to tenants at a rate of $750/month. At this rate, we can expect to make 750 × 12 = $9,000 per year in gross income from the rental property.

 

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:

  • $9000 (gross income)
  • -$900 (property management)
  • -$450 (maintenance)
  • -$710 (taxes)
  • -$650 (insurance)
  • =$6290 (net income) / $40000 (purchase price) = 0.157 = 15.7% cap rate

HOW TO CALCULATE A CAP RATE FOR RENTAL PROPERTIES

USA THANKSGIVING|How Many Cooks Are Allowed In Your Kitchen?

US Thanksgiving is here. How many cooks are allowed in your kitchen? Do you work alone, are all hands on deck, or do you order in? #thehelpfulagent #house #houseexpert #home #thanksgiving #listreports #realestate #realestateagent #holidays #happythanksgivingUS Thanksgiving| How many cooks are allowed in your kitchen?

Find out What Fred Does Online, Google Search Fred Carver Victoria

VICTORIA|VIDEO OPEN HOUSE TOURS

 

In Today’s real estate market, showing homes can be sensitive with Buyers and Sellers alike.

Due to the risks of catching the very contagious Coronavirus, home Sellers are worried about strangers coming into their home.

For many years I have done a walk through video tour showing a Home or Condo without the need of being there. Home Buying Consumers love it, especially out of town home buyers..

Victoria Home Sellers today ask me to do a Video Open House Tour to send to possible home buyers of a Video Tour of their home.

I place the Virtual Open House Tour on our MLS and my online presence on Social Media, YouTube and my Websites and Blogs

Find Out What Your Home is Worth Today! GO HERE

New Garage Doors Nearly Pay For Themselves!

New garage doors nearly pay for themselves! Wondering which other upgrades retain the most value when you sell? Send me a message to find out more!. fred@fredcarver.com or text me 250-413-7042

#fredcarverremax #fredcarvervictoria #home #upgrade #houseexpert #realestate #homeimprovement #invest #homereno #realestateagent #themoreyouknow

New Garage Doors Nearly Pay For Themselves!

Video Tour of a Top Floor Two Bedroom Fairfield Condo

Join me while I take you on my Video Tour of a Top Floor Two Bed Two Bath Fairfield Condo.Google Earth View #402-1031 Burdett Ave Victoria, BC MLS # 853768

Excellent quiet location, Southwest facing condo in move in condition.

Vinyl Wood flooring in the entrance and dining room and new carpets in living room and bedrooms, efficient galley kitchen. Naturally bright home with 2 skylights and a spacious enclosed balcony. Corner Heatilator fireplace in living room and lots of storage room. Generous master bedroom that will easily accommodate 2 twin beds or a king. Good sized second bedroom with a space saving Murphy bed.

Easy walk to the popular Cook Street Village shopping, downtown Victoria and the Victoria Waterfront.

The building includes a common laundry, secure bike storage, and meeting room. The condo includes a parking space. One Cat or Dog allowed and no age restrictions. Recent New Roof and Thermo Windows.

Quick Possession Possible.

CHECK OUT MY VIRTUAL OPEN HOUSE TOUR

CHECK OUT MY VIRTUAL OPEN HOUSE TOUR AND THE NEIGHBOURHOOD

In Today’s real estate market, showing homes can sensitive with Buyers and Sellers alike. Due to the risks of catching the very contagious Coronavirus, home Sellers are worried about strangers coming into their home.

For many years I have done a walk through video tour showing a Home or Condo without the need of being there. Home Buying Consumers love it, especially out of town home buyers.

Virtual Open House Tour
Taking a Video Walk Through for a Video Open House Tour

My Home sellers today ask me to do a Video Open House Tour to send to possible home buyers of a Video Tour of their home. I place the Virtual Open House Tour on  our MLS and my online presence on Social Media and my Websites and Blogs.

Check one of my latest Video Open House of a Fairfield Condo #402-1031 Burdett Ave I have listed For Sale. I even included a video of the nearby Fairfield neighbourhood at the end of the Virtual Open House Tour.

Are you consider selling your home but Nervous and Scared about strangers coming into your home due to the Coronavirus?  I can do a virtual open house Virtual Tour and safely find home buyers for you.

Call or text me at 250-413-7042 or email today so we  arrange meet on Facetime or Zoom.

Put my 40 plus years experience selling Victoria Real Estate to work for you too

Checkout the latest real estate stats on the Victoria Real Estate Market through the Victoria Real Estate Board monthly report. Most properties sold in Greater Victoria and the Southern Gulf Islands are listed and sold on the Victoria Real Estate Board’s Multiple Listing Service® (MLS®) System.

To analyze sale price trends in the Greater Victoria housing market, the VREB moved away from reporting changes in average and median sale prices. In its place, we now analyse trends using a system called the MLS® Home Price Index (MLS® HPI). MLS® HPI computed historic monthly benchmark prices for each benchmark home back to January 2005. Moving forward, VREB MLS® sales data is used to compute new benchmark prices each month. In addition to being able to report on changes in benchmark prices over time, MLS® HPI also maintains a running index of the percentage change in benchmark prices from the January 2005 starting point.

CHECK OUT MY VIRTUAL OPEN HOUSE TOUR AND THE NEIGHBOURHOOD NEARBY