Everyone in this industry is searching for the best places to invest in real estate. Investors want to know they’re going to get a strong return on the money they’ve invested in a rental property. Sounds fair enough, but how do investors find the right real estate market for them? Well, there are a couple of profitability indicators used in the real estate investing business- one of which is the capitalization rate (cap rate). Here’s what we’re covering today:
- What’s a market capitalization rate?
- How to find cap rate for a real estate market quickly and easily.
Defining Cap Rate
The cap rate is a pretty popular metric used among real estate investors as part of a return on investment analysis for rental properties. The cap rate expresses a percentage of the rate of return that your investment property will have. Dividing the net operating income by the investment property’s market value, investors can get an estimation of this rental property’s profitability. For a more accurate return estimation however, real estate investors are recommended to never rely on just one metric, but rather to use a combination of multiple metrics that measure all the different aspects of profitability.
The cap rate is most widely used as a quick analysis metric because of its simple calculation. The cap rate formula is as follows:
Cap Rate = Net Operating Income/ Property Market Value
This is the formula you would use when analyzing individual investment properties. Take the net operating income and divide it by the value (or cost) of the property. And although it seems simple enough, for a truly accurate and reliable estimation of return, real estate investors should make sure to use the right numbers. A lot of factors play a role in determining the net operating income and the current property value; one wrong estimation could throw the final cap rate completely off.
So why are we talking about investment property cap rates when this blog is about finding cap rate for a real estate market? That’s because the cap rates of investment properties in a housing market are what make up the cap rate for an area.
How to Find Market Cap Rate
Now that we know how to find cap rate for individual properties, let’s dive deeper into how to find cap rate for a real estate market. While investors could go through the extra effort of manually calculating investment property cap rates, if you aren’t using any real estate investment tools, it’s even more complicated finding the market cap rate. The solution?
Mashvisor’s investment property calculator. It can be used to analyze all the different aspects of rental property investment. So in addition to the cap rate, it also finds accurate estimations of cash on cash return, cash flow, and occupancy rate. Our calculator combines all the individual property performance metrics to get a market average. This data doesn’t need to be requested by you, it’s already provided on our website and is included in our market analysis tools. The main goal of our real estate investment tools is to provide US investors with accurate and reliable real estate analytics required to make the best investment decision in any market. The following is a more in-depth description of how to find market cap rate using Mashvisor.
1) Finding Cap Rates by City
Mashvisor collects data on both traditional and Airbnb rentals in markets across the nation. With millions of listings in our database, you can be confident in our calculations projecting accurate return estimations. The great thing about our platform is the ease of access to this data.
If you have a certain housing market in mind, you can simply search the market name on our real estate investment blog, and a list of blogs on that market will pop up. Typically, these blogs provide data on where to invest in these markets for high returns, along with market insights. The Mashvisor algorithm gives users access to rental property profitability in virtually all US real estate markets (statewide, citywide, and neighborhoods). If you’ve chosen a market that doesn’t have any recent blog publications, you can try our state and city guides.
2) Conducting a Neighborhood Analysis
Let’s say you’re searching for the best neighborhoods in a certain city. If you haven’t already found such a list on our blog page, there’s another access point for this information: Our heatmap analysis tool.
This is the ultimate “how to find cap rate for a neighborhood” tool. Our analysis tools already do the work for you. We calculate key return metrics, rental rates, and store investment property details for each neighborhood. This data is found for each listing in our database on the location, and then the average performance level is calculated. But how is this used by our heatmap tool to help you find the cap rate for neighborhoods?
Our heatmap analysis tool has a very user-friendly design. Once you’ve determined which city you’d like to further analyze, search for it on the heatmap. You’ll have the option to filter our results based on your investment property criteria. Users can choose from a number of filters such as rental income, property price, and Airbnb occupancy rate.
If you want the search results to be based around cap rate, set the “cash on cash return” as the priority criteria. Because the tool doesn’t take into account your financing (that’s what the rental property calculator is for), the cash on cash return is equal to the cap rate for locations. The different neighborhoods in that city will then be highlighted with different colors: green indicates high-cap rate areas, red indicates low-cap rate areas.
This tool will also help you compare the cap rate of individual properties against the neighborhood average. It’s the best solution for those wondering how to find cap rate for a market. This tool does just that and narrows down the market search until you find the best investment property in that neighborhood.
Do you want to give it a try? Learn about your options for signing up for our services by clicking here.