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The phoenix real estate market is incredibly hot right now and not just in single family residences(SFR). This market is attracting a ton of investors, both experienced and inexperienced. Cap Rates come in handy when you are trying to decide if investing in a particular peice of real estate will give you the return on investment you are hoping for. While SFR's are a great investment, good deals are becoming harder and harder to find and bidding wars are driving up prices. Don't get me wrong, you can still find some great deals but the reality is that we are in a "Sellers Market" and cap rates (ROI) on SFR are getting smaller.
So how can you invest in phoenix real estate and still bring in a hefty ROI ??? I'm glad you asked!!! Take a look at Multi-Family Developements. These can be an even bigger and better investment than SFR and most likely will be cash flowing right away. Multi Family Developements typically will have an income and expense report attached to the listing telling you what income the property is bringing in and what expenses there are to maintain the property. It's like a small business plan already laid out for you.
Let's Take a look at a pretty common scenario in the Phoenix Real Estate Market.
Understanding Cap rate Vs. Initial Return on Investment.
Lets say you buy a Multi Family Unit Fourplex in Phoenix for $150K cash and your "net operating income" after all expenses is $15,000. Then $150,000/ $15,000 = 10.0 Cap Rate, or a 10% return on your investment year after year. This does not take into account Depreciation or Appreciation, which can happen simultaneously when it comes to investment properties. While the value of the home may be increasing you can depreciate your asset when tax time rolls around. (please see your CPA for more info.)
Now that we know how to calculate Cap Rate, Lets see if we can't get a little better return on our money.
Leveraging your money can give you an even higher return. An "initial rate of return" indicates your ROI if you were financing with an initial down payment and subtracting Debt service. Debt service is simply the interest on the loan and any servicing fees chanrged by the lender. Lets look at the same scenario from above but this time we will put 25% down and borrow the rest at a 5% Interest rate. Example ( (Property Purchase price = $150K), (Initial Investment (25%Down Payment)= $37,500), (Cap Rate = 10.0($15,000 net income)) -( Debt Service@5% on $112,500 = $5,625/ year).
Cap Rate = Net Operating Income/ Purchase Price ($15,000/ $150,000) = 10%
VS. Initial Return On Investment = Net Operating income - Debt Service/ Down Payment ($15,000 - $5,625/ 37500) = 25% ROI
The Moral of the story here is to leverage your money while rates are low and earn a higher return on investment.
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.