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# Thinking of investing in Porltand Real Estate II

Real Estate Agent with Pete Anderson Realty Assoc. Inc.

This a follow-up to the blog dated 1/20/2008

Once you have found a unit that breaks even or actually has some cash flow there are some numbers you need to learn how to calculate. Most investors want to know the capitalization rate of a property. This is how to calculate the cap rate. Start with the gross income then you need to minus the expenses (except the payment).

Example:     rental income                                                                                              \$24,000.00

Less expenses, water, garbage, insurance, property taxes, etc.                      \$8,500.00

Don't forget maintenance expenses

If you manage your units yourself use zero, if you use property management add that expense.

The net income on this property is                                                             \$15,500.00

To find the cap rate, we take the net income divided by the purchase price.

The example purchase price is \$232,500.00

So \$15,500.00 net income divided by \$232,500.00 = a cap rate of .066 or 6.6%. Most investors are looking for a cap rate between 7%-10%, so this property is a little low. However investors also use other criteria and may select a property with a lower cap rate for extenuating circumstances. It might be a fantastic neighborhood, they might feel they can raise the rents or improve the property and sell at a higher profit. You have to make your own judgements.

The reason we don't include the mortgage payment is because different buyers have different down payments. One might pay cash for the whole price another might put down \$100,000 or another 25% down. The cap rate of a property does not consider the down-payment or mortgage lien payment. It is calculated only by the net income in relation to price. The investors can evaluate each property to decide if this is a good return or the purchase price.

The reason the cap rate is so important is because what can you get if you just leave or money in the bank? What about if you buy a mutual fund or other investments. So the cap rate shows the investor the return on the investment. Is it worth it?