Skip to content Sitemap

Blog

Using the Cap Rate to Make Your Investment Property Decisions

Ways to use a Cap Rate in Real Estate

Real estate investing is undoubtedly one of the best and safest ways to make money compared to shares and stocks. In fact, 90% of the world’s millionaires are involved with this particular activity.

Of course, not everyone who invests in real estate will see amazing results or even results at all. The key to successful real estate investing is knowing how to properly find and evaluate a property.

Now, there are four main ways to calculate the profitability of a real estate investment. These include: cash on cash, net operating income, the rate of return, and cap rate. In this article, we’ll focus entirely on the cap rate.

What is a “Cap Rate?”

Often just called the cap rate, the capitalization rate is the ratio of Net Operating Income (NOI) to property asset value. It’s the most commonly used baseline for comparing investment properties.

The higher the rate, the better the investment’s return on investment (ROI). Let’s take an example of how a cap rate is commonly used.

Calculating your Cap Rate

Suppose a property has a price tag of $100,000 and can earn an annual income of $12,000 (or $1,000 per month). Ongoing costs like property management fees, homeowners association (HOA) fees, property taxes and other fees sum to $350 per month.

Now, your net operating income (NOI) per month becomes $650. Multiply this by 12, and you have an annual net operating income of $7,800.

Next, divide the NOI by the property’s value. ($7,800/$100,000). This gets you 7.8%, which is the property’s cap rate.

Why Capitalization Rates Matter in Investment Property Decisions

The cap rate offers an accurate estimation of a property’s profitability. This is a vital metric for real estate investors. It helps investors compare potential investments and understand their investment’s return prior to deploying their capital.

Homes in Tampa

Below are some reasons why savvy real estate investors like to use cap rates.

· Helps in choosing between investment options

Sometimes, investors find themselves in situations where they have to choose between two or more viable investment opportunities.

It may seem overwhelming at first glance. What type of property should you invest in? Understanding the cap rate can prove helpful in this regard. It’ll help you know which investment option has the best ROI potential.

·  Gives you the chance to get a detailed understanding of all the operating costs

When it comes to operating an investment property, management and overhead costs can easily get out of control.

Understanding your NOI early on, may enable you to make changes that would help increase your profitability. For example, you may realize that a property has excessive energy costs because of certain inefficiencies.

Deciding Whether a Property Is a Good Investment

Deciding on an Investment

Doing the math is the only way to determine if a property is a good investment. As mentioned before, the higher the rate, the higher the property’s ROI. Many experts agree that anything closer to 10% means the investment is a good one.

When prospecting for an investment property, avoid making decisions based on emotions. Rather, base your decisions on critical analysis.

To better illustrate this, suppose landlord ‘A’ is prospecting for an investment property in Tampa, Florida. They have narrowed it down to three options:

·      The first property is valued at $700,000

The annual rent and average annual expenses are projected to be $72,000 and $20,000 respectively. Therefore, the cap rate for that property becomes 7.43%. ($72,000 – $20,000/$700,000).

·      The second property is valued at $415,000

The annual rent and average annual expenses are projected to be $54,000 and $23,000 respectively. Therefore, the cap rate for that property becomes 7.47%. ($54,000 – $23,000/$415,000).

·      The last option is valued at $500,000

The annual rent and average annual expenses are projected to be $48,000 and $30,000 respectively. Therefore, the cap rate for that property becomes 3.6%. ($48,000 – $30,000/$500,000).

Landlord ‘A’ can clearly see that the last investment option isn’t worth it. The first two, on the other hand, have similar capitalization rates. So, which option should they choose? Well, this is the simple part.

To make the right decision, they’ll need to consider other factors. For example, future value predictions, upgrading needs, and location.

Using Cap Rate to Know when to Sell an Investment Property

Savvy property investors can also use this rate to know when to sell an investment property. According to Financial Samurai, if your cap rate is below a risk-free 10-year Treasury

bond rate, consider selling.

As of January this year (2018), that rate was 2.55%.

Presently, San Francisco seems to have the worst average cap rate at 2.8%. For investors there, selling their property now would be the worst decision. That said, it’s still possible to reach a cap rate of 2.55% or lower depending on your property’s loan interest rates, taxes, and maintenance needs.

Aside from cap rate, there are a number of other factors to consider when answering the “should I sell” question.

  • Is your investment property bringing in consistent negative cash flow?
  • Do you still have time for your investments?
  • Is the tax reform against your investments?
  • Does real estate make up 50% or more of your net worth?
  • Is your property being targeted for tax hikes?
  • Do you enjoy your investment property business?

When to Sell an Investment Property

Whether you are just starting out or are a seasoned investor, understanding how to use cap rate during your decision to purchase an investment property is essential. Hopefully, this article has been helpful in this regard.

If you would like assistance, don’t hesitate to reach out to us at Advantage Real Estate Services. We would be happy to answer any questions you may have!

Raising the Rent on Your Tampa Rental Property

raising-rent-tampa-florida-rental-property

Telling your Tampa tenants that you are raising rent is undoubtedly among the most stressful moments of the rental property journey.

Be that as it may, even if the price of rent does go up, not all of the rent changes have to be dreadful. You just need to have a good plan!

In this article, we’ll cover everything you need to know about raising the rent on your Tampa rental property. From the reasons why an increase in rent may be necessary to how to handle backlash and everything in between.

(more…)

Best Areas in Tampa to Invest In

tampa-areas-investing

Are you an investor looking to buy and rent out single-family homes? If so, the Tampa Bay area is a good place to do it. In fact, Tampa finished third on Business Insider’s list of the best cities to invest in real estate for the second consecutive year.

So, why is Tampa ranked so highly for real estate investing? Here is why:

(more…)

Best Questions to Ask When Hiring a Property Manager

hire-property-manager-interview-questions

It takes talent and distinct skills to become a successful property manager. Not everyone is cut out for it.

So, when searching for a property manager, you want to ask the right interview questions:

 

1. Is your property management company established?

You don’t want to risk your valuable rental asset to a company that’s doesn’t have the necessary experience. You want a manager who brings value to the table. For example, professional relationships with insurance companies, HOAs, maintenance vendors, etc.

(more…)

What’s the Difference Between Landlord and Tenant Insurance?

Often, the question gets worded as something along the lines of, “I own a duplex and live in one side and rent out the other side, what type of insurance do I need?”  Other times, we may be asked, “I own a single-family home that I rent out to a tenant, my tenant doesn’t need insurance because my insurance covers their items, correct?”rental-home

 

No matter how the question is asked, the answer usually not as simple as yes or no.  In today’s world, ensuring you have the right insurance coverage to protect yourself (and your tenants) is crucial.  A local agency here in Tampa, Omega Insurance Agency, provides the following valuable information to explain the details a little further.

(more…)

Top 5 Questions to Ask Potential Tampa Tenants and What Not to Ask

questions-ask-tenants

Every landlord wants awesome tenants. These are the tenants who keep the place clean, pay rent, report maintenance issues, and don’t complain often. However, as most landlords in Tampa can attest, getting such a tenant isn’t an easy task.

Getting a good-quality renter requires a lot of homework. And, most of this homework involves screening each and every tenant to determine their suitability to rent your property.

Typically, a good screening process involves doing such things as checking out every prospective tenant’s criminal records, income sources, rental references, and credit report. Also, key to the success of screening potential tenants is knowing what questions to ask. (more…)

5 Landlord Tips to Have Better Relationships with Your Tampa Tenants

tips-landlord-tenant-relationship-tampa

Every Tampa landlord knows that a high tenant turnover is detrimental to their bottom line. That’s why many focus on building a healthy relationship with their tenants.

When you have a good relationship with your tenants, you can rest assured that there will be minimal problems to deal with. Besides, a good relationship will directly impact your lifestyle, comfort, and finances.

The following are 5 tried-and-tested tips to better your relationship with your Tampa tenants.

(more…)

The Importance of Performing Inspections at Your Tampa Rental Property

perform-inspection-tampa-rental-property

No matter how thoroughly you screen tenants, routine inspections are a must for any Tampa landlord. Routine rental property inspections will help you realize the best possible rental income, protect your investment and maintain your property in good condition.

There are five types of rental property inspections that you should be doing at your Tampa rental property.

(more…)

Security Deposit Laws in Florida

security-deposit-laws-florida

In Florida, many residential rental agreements or leases require a security deposit. Usually a month’s rent, a security deposit is a dollar amount that’s collected by the landlord to protect against property damage due to a tenant’s negligence or carelessness.

When it comes to security deposits, Florida landlords and tenants both have certain basic rights. These rights are specified under Florida landlord-tenant law. Landlords must comply with these laws when handling a tenant’s security deposit.

Here’s a quick rundown of the security deposit laws in Florida.

(more…)

Overview of Landlord-Tenant Laws in Florida

fort-lauderdale-florida

Florida is one of the largest states in the country by population. Recent estimates say there are over 20 million people living there. Out of this, 13.3% are renters. To help bring order to the millions of tenants and landlords in the state, Florida has put together an extensive landlord-tenant law.

(more…)

Next Page »