All real estate investments are associated with some risk. The goal of a real estate investor is usually to find a rental property with high returns but a low level of risk. So how do you analyze potential investment properties before buying one? One of the most crucial real estate metrics that savvy investors take into account is the capitalization rate, otherwise referred to as cap rate. Knowing how to calculate cap rate is an important skill that every real estate investor needs to have. The purpose of this blog is to explain what the cap rate is and to show you what the best cap rate rental property calculator to use is. With a good cap rate calculator in your rental property toolbox, you will be able to confidently analyze and buy profitable rental properties.
What Is Cap Rate in Real Estate Investing?
Capitalization rate (cap rate) is a metric that measures the rate of return on an investment property for a single year when purchased with cash. This means that debt on the property is not taken into account. This makes it easier to compare the relative value of multiple properties. The cap rate can also be looked at as a measure of how much risk is involved in buying a particular rental property. What return can you expect given the level of risk the property carries?
According to the cap rate formula, cap rate is the ratio of the annual net operating income (NOI) of a rental property to its fair market value or purchase price.
Cap Rate = (Net Operating Income/Fair Market Value) × 100%
Net Operating Income refers to the difference between the annual rental income and the annual operating expenses of a rental property.
NOI= Annual Rental Income – Annual Operating Expenses
What is included in the calculation of operating expenses may vary. However, mortgage payments are not included. Here are some of the common rental property operating expenses:
- Property insurance
- Property tax
- Rental income tax
- Property management fees
- Repair and maintenance
- Marketing and advertising
- Accounting fees
- Legal fees
- HOA fees
- Pest control
It’s important to note that in order to accurately calculate the NOI, you should account for the time the rental property is vacant. This is because vacancies eat into the potential annual profit made by the real estate investor. Therefore, a more sophisticated and accurate NOI formula would be as follows:
NOI = Annual Gross Rental Income – Annual Operating Expenses – Vacancy Expenses
What Is a Good Cap Rate?
As a real estate investor, calculating cap rate is not the end. You need to interpret the value you get. The question then arises: What is a good cap rate? The higher the cap rate value, the better the return on investment. However, the highest cap rates are not necessarily the best. A high cap rate means that the risk will be high. Most real estate experts agree that the range for a good cap rate is between 8% and 12% for both Airbnb rentals and traditional rentals. This range offers the perfect balance between the potential rate of return on an income property and the level of risk it carries.
Given the variation in the nature of rental properties, cap rates are typically used to compare potential rental properties on a more apples-to-apples basis. Cap rates will vary depending on factors such as property type, property condition, location, investment strategy, and market conditions. For instance, cap rates for multifamily homes tend to be lower than cap rates for single-family homes. This is because multifamily homes are considered to have a lower risk. If there are many high cap rate multifamily real estate properties in an area, it could mean that investing in multifamily homes in that area is riskier. Of course, you will have to explore other elements like the crime rate and market trends before you can come to this conclusion.
What’s the Best Way to Calculate Cap Rate?
Cap rate calculation for a single property using the cap rate formula is quite easy and straightforward. The problem, however, comes when you want to compare several investment properties before you pick which one to purchase. It would be a very long and tedious process calculating cap rate for multiple properties for sale manually.
Time is of great significance when looking for lucrative real estate deals. You don’t want to be spending a lot of time doing investment property analysis only to find out that you’ve lost a great deal to a swifter investor. As a real estate investor, being able to calculate cap rate quickly and accurately will give you a competitive advantage. This is where technology comes in. One of the real estate investment tools you need to stay competitive in the industry is a cap rate rental property calculator. To learn about what a rental property cap rate calculator actually is and the best one to use, keep reading.
What Is a Cap Rate Rental Property Calculator?
Having a cap rate calculator for rental property is crucial when analyzing multiple rental properties for sale, especially as a beginner real estate investor. It is a variation of the rental property calculator which is used to quickly and efficiently calculate cape rates for rental properties. This tool is useful in deciding which rental property to buy within a relatively short period of time.
There are hundreds of thousands of rental property listings in the US housing market. You can imagine how overwhelming and time-consuming it would be having to calculate the cap rates of several rental properties which are of different types and in different housing markets. The best alternative is to use Mashvisor’s cap rate rental property calculator. Investors can use our tool to analyze and find high cap rate properties for sale in the US market. It does this for an unlimited number of rental properties for sale using rental comps, predictive analytics, and machine-learning algorithms.
With our calculator, finding cap rates of both traditional and Airbnb rental properties is made easier regardless of your experience. What could have taken months of research can be done in a matter of minutes. Moreover, Mashvisor’s cap rate rental property calculator does not limit you to cap rates for real estate listed on the platform. You can enter data on any rental property in the US housing market and you will get readily available analytics in a matter of minutes.
The Bottom Line
Cap rate is a key profitability measure for rental properties. Considering today’s competitive real estate market, it’s more crucial than ever for investors to understand how to use cap rate to make informed investment decisions. Having a good cap rate rental property calculator makes things even easier. If you are considering buying a cap rate rental property calculator for your investment property analysis, be sure to use our calculator. It is user-friendly and can be easily used by anyone.
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