There are many investment property analysis tools, which aim to help the real estate investor in deciding which property is a good investment opportunity. One of them is the capitalization rate. What is a cap rate, though? What is a cap rate calculator? Most importantly, why do you need to use it in your real estate investing career? Keep reading to learn the answers to these questions and get some more useful information on the topic.
What Does the Cap Rate Represent?
The return on investment (ROI) is a key component of the business of each and every real estate investor. Return on investment, however, is considered to be a quite broad term. Instead, real estate investors are measuring the ROI through two more specific tools. These are namely: the cash on cash return (CoC) and the cap rate. The capitalization rate represents the rate of return on an investment property, based on the possible income that this property will generate. Therefore, the cap rate estimates the investor’s potential return on all cash investments.
How to Calculate Cap Rate?
The formula is simple:
Cap Rate = Net Operating Income (NOI)/Current Market Value of the Property
Let’s review an example. A real estate investor is looking at an investment property, which has an estimated market value of $1,000,000. The estimated annual income, or the so called NOI, is $150,000. Therefore, the cap rate is:
Cap Rate= $ 150,000/$ 1,000,000
Cap Rate= 0.15= 15%
It is typically assumed that the higher the cap rate, the higher the possible profitability. However, with increasing the cap rate, the risk of investing in the property also increases and vice versa – the lower the cap rate – the lower the risk, but also the lower the possible profitability. Though, that does not answer the most important real estate question here, specifically: What is a good cap rate? Well, there is no specific range in which the good cap rate falls. However, a real estate investor can research the average cap rate at the location of his/her interest. Aiming for something a little bit above the average is considered to be a good cap rate for the start of investing in a property.
Calculating cap rate on investment property might be extremely beneficial for you as a real estate investor. Yet, it seems a hard task to compute all these values manually, especially if you are comparing different real estate investment properties. Luckily for you, there is a tool which will help you – the cap rate calculator.
What Is a Cap Rate Calculator?
The cap rate calculator is one particular type of an investment property calculator. This means that the cap rate calculator is a tool which helps you in conducting investment property analysis. Therefore, it is an important part of choosing positive cash flow properties. This particular real estate investing tool is user friendly and easily accessible online. Additionally, it helps the real estate investor in minimizing the effort needed for calculating values manually. The cap rate calculator can compute all the previously mentioned values, such as net operating income, current market value, and, of course, the cap rate itself. Depending on the information the real estate investor enters, the cap rate calculator can compute any of the described variables. For instance, it is possible to see what the probable market value of the investment property you own is. You need to enter your net operating income as well as the average cap rate in the area of your property. The cap rate calculator will show you the possible market value of your current real estate investment. This example shows that the cap rate calculator is useful for various purposes and is extremely useful in assisting you in finding and keeping the best investment properties.
Why Do You Need Cap Rate Calculator in Your Real Estate Investing?
The cap rate calculator has many functions which every real estate investor needs when developing his/her business. Here are some of the major benefits the cap rate calculator will bring to your real estate investing investing:
#1 Quick Analysis of an Investment Property
It is well known that real estate investors want to build their portfolio by investing in positive cash flow real estate properties. Positive cash flow simply means that more money inflow than outflow for a specific period of time. Therefore, to generate positive cash flow, an investment property should bring higher profit than costs. The cap rate calculator is useful as an indicator of positive cash flow properties. The reason behind this is the fact that the tool calculates not only gross and net annual income, but the overall costs of a property as well. Moreover, it can also compute the market value of an investment property. The latter is extremely helpful when a real estate investor decides to sell his/her property.
#2 Comparison of Different Real Estate Investment Properties
In searching for the best investment property, real estate investors usually compare different real estate properties. The cap rate calculator makes that process fast and easy. It computes the values within seconds, and the comparison is easy to make. Furthermore, this data is available wherever you go without the necessity of carrying countless sheets of calculations.
#3 Checking the Performance of Your Real Estate Investment
Last but not least, the cap rate calculator can be used not only as a tool prior to investing in a real estate property, but also as an indicator of performance. This means that the cap rate calculator is helpful when following the development of your real estate investment property. This is done by computing the capitalization rate over specific time intervals. If the percentage of the cap rate is increasing, this means that your real estate investment property is performing well. If, however, this percentage is decreasing, you might need to consider selling the property.
The cap rate calculator is one of your best friends in the real estate investing business. Thus, do not forget to review Mashvisor’s investment property calculator for receiving more information from a single online tool.