When buying a rental property, every real estate investor is envisioning making money in real estate. However, every house investor wants to start making money in real estate and avoid at all costs losing money. This can be achieved by financing a positive cash flow investment property. Yet, finding positive cash flow investment properties is not that simple. In order to have a positive cash flow real estate investing business, you need to take a couple of real estate metrics into consideration. In principle, it is true that a positive cash flow occurs when the rental income of an investment property is higher than the rental expenses associated with that very same income property. Nonetheless, there are metrics such as cap rate and cash on cash return, which can be used to identify positive cash flow for buying an investment property in a specific location to make for a good investment decision.
In this blog, we will review one of these metrics: the cap rate. We will go over all the topics concerning the variable. For instance, what is cap rate as well as how to calculate cap rate? Moreover, we will discuss what is a good cap rate for rental properties and how can you assure good cap rate for rental properties?
#1 Good Cap Rate for Rental Properties: What Is Cap Rate and How to Calculate Cap Rate?
Before jumping into the discussion of what is a good cap rate for rental properties and actually, how to assure good cap rate for rental properties, we need to understand what cap rate is and what the cap rate formula for computation is.
Cap rate is a real estate metric which represents the return on investment on an income property regardless of the financing method when buying an investment property. This value is computed on the basis of the rental income the investment property is expected to generate. This means that cap rate is an indicator when purchasing investments. It shows how much of the value of the income property the house investor will receive in profit. In order to compute the metric, you should know the potential rental income of the investment property, the potential rental expenses as well as the value of the investment. Let’s see what the cap rate formula is.
How to Calculate Cap Rate
The cap rate formula is actually pretty simple. Cap rate is calculated by dividing the net operating income by the current market value of the investment property. In order to make it absolutely clear, we will observe each of the variables in the equation.
The net operating income is the annual rental income of your investment minus the yearly rental expenses associated with the investment.
The market value, on the other hand, is how much the property is worth in the current real estate market.
However, computing cap rate is only a small part of the process when buying a rental property. The important part is finding an investment which has a good cap rate for rental properties and will, most likely, transform into a positive cash flow investment property. To get a deeper understanding of the topic, make sure to check out “How to Calculate Cap Rate for Rental Properties Most Efficiently.”
But, the most important question remains: “How to define good cap rate for rental properties?”
#2 What Is a Good Cap Rate for Rental Properties?
A good cap rate for rental properties is hard to define as the value depends on numerous factors. Variables influencing the value of a good cap rate for rental properties are the specific local real estate market as well as the investment property type. It is generally considered that a value between 8% and 12% is a good cap rate for rental properties. Nevertheless, these values are nearly impossible to reach in real life situations. The truth is that in the current US real estate market, values above 4%- 5% are a good indicator when buying a rental property.
Do you want to learn more? Please visit “FAQs: What Is a Good Cap Rate for Rental Property?”
#3 How to Assure Good Cap Rate for Rental Properties
There are a few things you can do in order to assure that the property you invest in has good cap rate for rental properties. By following these steps, you will start making money in real estate much faster and will, of course, eliminate the chance of losing money from your investments.
Conduct Research Before Buying an Investment Property
The first thing you need to do in order to assure your property will generate positive cash flow is to conduct research. Explore the real estate market by performing real estate market analysis. This will help you in defining the state of the market as well as reveal some important numbers. Such are: cash on cash return and cap rate, concerning the potential growth on the market.
Additionally, conducting investment property analysis will be useful for getting the proper information regarding the specific property of your interest. Even though conducting analysis is extremely useful, it is a hard task to do manually. Don’t worry- we have a solution for you!
Use Mashvisor’s Investment Property Calculator
Mashvisor’s investment property calculator is the perfect tool to use for conducting real estate market analysis and investment property analysis. This way you can simplify the process of finding and selecting a positive cash flow investment property. Besides providing you with all the calculations of cap rate, cash on cash return and all the other metrics you might need, the tool has other great features as well. It suggests to you the optimal rental strategy for your investment property. Moreover, Mashvisor’s investment property calculator provides you with in-depth property and neighborhood analysis. Last but not least, the tool takes into consideration the method of financing you choose to use for your investments. To get a better view of the way this tool operates, you can read “Mashvisor’s Investment Property Calculator: Real Estate Investing Made Easier.”
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