When looking at real estate properties for investment purposes, there are some quick formulas used to evaluate "the deal". One such way is looking at the cap rate. What exactly is the cap rate, and why is it an important clue to the potential of a property deal. It measures the potential for income against the expenses that a property generates.
Net Operating Income (NOI) / Property Value x 100 = Cap Rate
Net Operating Income = Annual Rental Income - Operating Expenses
A general example would go like this:
Annual Rental Income: $30,000
Operating Expenses: $10,000
__________________________
Net Operating Income: $20,000
Property Value: $400,000
Cap Rate = 5%
This shows that the property is generating more income than it is operating on, and that the deal is a pretty good deal. There are times that the cap rate is not what you look at when considering purchasing a property. Location, vacancy rate, and long-term market trends need to fit into your investment strategy as well.
Smarter Investing starts with Smart Analysis. Why do busy professionals choose to use cap rates? Being able to compare multiple properties in minutes. Estimate potential Return on Investment (ROI) before making an offer. Identify stronger cash-flow opportunities. Removes emotions from investment decisions.
Whether you are investing in your 80th property, or considering your first, I am available to assist you through the process and feel confident in making your next real estate move.