Time is gold when it comes to business. That is exactly why investors tend to use tools to help them save as much time as possible. So, as a real estate investor, do you need a cap rate investment property calculator? Why or why not?
The cap rate investment property calculator has been a great help for real estate investors when evaluating the best real estate investment deals. The only thing about it is whether it is a necessity or not. Here are some facts about this real estate investing tool and why is it a must for real estate investors:
Related: Investment Property Spreadsheet Has Become Obsolete With the Investment Property Calculator
What is capitalization rate?
The capitalization rate is also referred to as the cap rate. It is basically a property valuation method which real estate investors use to estimate the return on investment for their rental properties. The importance of it shows when real estate investors compare properties to spot the best investment deals.
How does the cap rate work?
The cap rate formula is pretty basic. You calculate the net operating income (NOI) of your investment property and then divide it by its market value. The formula looks like this:
Cap rate = Net operating income/Property price
Break down the cap rate:
As you have noticed, the cap rate formula consists of two variables: The NOI and the property price.
The net operating income: The NOI is basically the annual cash flow of your investment property. This value is a pre-tax value and that is what you should pay attention to. To calculate the net operating income, you just take your monthly rental income, subtract the monthly property expenses, and then multiply the value by 12 months.
An important thing to keep in mind is that you want your rental property to be producing positive cash flow in order for it to be profitable. After all, positive cash flow is the way to make money in real estate. Any negative figures mean that you are experiencing a loss.
The property price: The property price is as basic as it sounds. That is the actual market value of the investment property that you have paid. For this, you will not have to consider any financing strategies. That is unlike the cash on cash return, which takes into consideration the financing method.
What does the cap rate investment property calculator do?
To put it simply, the cap rate investment property calculator is the real estate investing tool that does all the calculations above. It is an online tool, and, of course, it costs some money that adds up to your property expenses. However, we are here to tell you why it is worth it for a real estate investor to have the cap rate investment property calculator.
First of all, calculating the cap rate might get a bit challenging. As simple as the variables might seem, they have more to them. Sometimes figuring out all the numbers involved gets confusing and time-consuming. The best thing to do in this case is to actually use the real estate investing tool that will eliminate the errors and save you the time to do all the calculations. You essentially type in your numbers, and it does the rest for you.
Second, the cap rate investment property calculator is not just about the cap rate. It goes beyond that to calculate other values such as the cash on cash return. Now, many beginner real estate investors do not understand the differences between the two profitability metrics. Though they are similar in terms of estimating the return on investment, they have one major difference: the cash involved. The cap rate, as we mentioned before, calculates the return on investment regardless of the financing strategy. It does not matter whether you paid all in cash or got a mortgage. On the other hand, the CoC return calculates the rate of return on the actual cash invested. It takes into consideration the method you used to finance your investment property.
What else does the cap rate investment property calculator tell a real estate investor?
The best part of a cap rate investment property calculator goes beyond the numbers you provide. It actually gives you facts about the real estate market, especially for residential real estate investors. Investing in rental properties is challenging. In order for you to have a profitable rental property, you will have to take into consideration the following factors:
First, the location of your investment property is like the holy grail for your business. Unless you want to be losing money, you will have to pick the right location at all times. The cap rate investment property calculator is the real estate investing tool that helps you do just that. It uses real estate comps as well as real estate market analysis to help you spot the best locations for buying an investment property.
Second, before buying an investment property, make sure you compare it to other similar properties within the same location. For this, you might also want to use the cap rate investment property calculator. This is called performing real estate market analysis. This tool uses comparative market analysis to do so in the most accurate way possible, which leaves you with the best choice of properties to invest in.
Related: A Step-By-Step Guide to Real Estate Market Analysis
Third, choosing the right rental strategy is also vital for a profitable investment property. Going with the wrong rental strategy might cost you a lot. There are locations that are best for Airbnb rentals. There are also places that are best for traditional rentals. Make sure you take that into consideration and use a cap rate investment property calculator to choose the optimal rental strategy if in doubt.
How about Mashvisor’s cap rate investment property calculator?
Looking at what we have mentioned above, it seems overwhelming to perform all these analyses and calculations manually. However, you have come to the right place to save you the pain of going through the process. Mashvisor’s cap rate investment property calculator is great when it comes to analyzing the real estate market as well as specific investment properties. Therefore, if your goal is to make money through real estate investments, then only the right tool will take you do that in no time. So, make sure you check out Mashvisor to learn more about the real estate investing tools that will help you spot the best real estate investment deals.