Real estate investing is a lucrative endeavor when done correctly. As a real estate investor, you need to have some understanding of the math behind your investments. If you don’t take the time to crunch the numbers and take into consideration the costs and gains, you may be missing out on profits. Therefore, understanding how to properly assess your rental property investments using the right calculations and investment tools is essential. You can do this through a common real estate investment tool known as the cap rate calculator. In this blog, we will cover what this tool is, what it does for investors, and why you actually do need the cap rate calculator when determining the profitability of your rental property.
What Is Cap Rate?
A cap rate is a percentage that refers to the annual return on real estate investment. It is defined as the net operating income of your rental property in relation to its asset value. The capitalization rate is good for assessing the profitability of your rental property because it takes into consideration operational expenses and vacancy rate. The cap rate shows you whether or not your rental income has the ability to pay off the property price.
So, what’s a cap rate calculator? A cap rate calculator is a type of investment property tool that determines the profitability of your investment using data and predictive analytics to provide you with expense estimates, rental income data, and ultimately, current cap rates.
The Cap Rate Formula
If you are wondering how to calculate cap rate, it’s pretty straightforward. You don’t need multiple Excel spreadsheets to assess this metric for one rental property. To calculate the cap rate, you simply divide the net operating income by the value of your property.
The issue comes when you are looking at hundreds of investment properties, wondering which one to buy. In this case, you will be forced to organize spreadsheets, gather data, and use Excel formulas- unless you have access to a cap rate calculator. This real estate investment tool will help you make the best real estate investment decisions without the hassle of doing the math yourself!
What Is a Good Cap Rate?
It can be difficult to determine what a good cap rate looks like. A good cap rate will depend on the market you’re in. For example, investing in a large real estate market with growing demand is a less risky move than investing in a smaller market with little to no growth. For this reason, you may be willing to accept a cap rate of 7 percent or less in a big real estate market such as Los Angeles.
It will also depend on the investment goals you have as a real estate investor. Generally speaking, a good cap rate is 10 percent or more.
Keep in mind that you should also take into account the projected short-term and long-term performance of an investment property as well and not just look at cap rates. This is why a cap rate calculator is a useful tool because some of the best ones will perform a full investment property analysis for you to be sure you not only find a good cap rate but a generally profitable property.
The Benefits of Using a Cap Rate Calculator
So, we have learned a few benefits of the cap rate calculator already:
- The cap rate calculator offers you an accurate estimation of your rental property’s profitability.
- It allows you to understand your return on investment.
- It will help you make better real estate decisions.
The benefits of using a rental cap rate calculator are outlined in greater detail below:
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Clear Understanding of Operating Costs
Management and overhead costs can spiral out of control when you are managing an investment property. A cap rate calculator can help you understand all of your operating costs in detail. This helps you bring to light atypical expenditures that you may otherwise have not known about. For example, your property’s cap rate may point to excessive energy costs due to an inefficient heating/cooling system. You can increase your rental property’s profitability by calculating and monitoring your net operating income.
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Better Informed Decisions
As a real estate investor, you may face many viable investment options during your real estate property search. Choosing between real estate investments could be intimidating but it doesn’t have to be. The cap rates of your potential investment options will point you to the best real estate investment. This is because two similarly priced properties may have two very different annual rates of return. As such, the cap rate calculation can help you make better informed real estate decisions.
The capitalization rate calculator can steer you towards rental properties that will yield the greatest return on investment with just a quick glance. With this tool, you don’t have to perform the calculation every time.
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Investment Property Analysis
The cap rate calculator provides you with a rental property analysis by determining which rental properties bring in positive cash flow. This is because the tool gives you the overall costs of the property in addition to gross and net annual income. It can also calculate the market value of the investment property. This will be really helpful when making an offer on the property as well as when you want to sell the property later on.
Mashvisor’s cap rate calculator also provides metrics like cash on cash return, occupancy rate, and even market cap rates for a full investment analysis. Sign up now to give it a try.
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Track Performance of Your Real Estate Property
Your rental property calculator can determine the performance and development of your property. You can figure out if your investment property is performing well by calculating the capitalization rate over time. If the percentage of the cap rate increases over time, this means that your property is performing well. Otherwise, you should look into selling the property.
To Conclude
A cap rate calculator is a great real estate investment tool for investors as it gives you a clear understanding of your return on investment. This, in turn, will help you make better real estate investment decisions. However, as with any other metric, a cap rate shouldn’t be used as a sole determining factor in your decision-making process. With that said, you should use Mashvisor’s real estate cap rate calculator (the ultimate investor’s workbench that provides multiple pre-calculated metrics) to build a profitable real estate investment portfolio.
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