Thinking of investing in real estate? Here are some quick tips.
Cap Rate
What is cap rate? Cap rate is a rate of return. It’s a measurement to determine the potential return on a real estate investment. This is one of the easiest way to measure whether the investment is worth pursuing.
How is Cap Rate Calculated?
The formula is:
Cap Rate = Net Operating Income (NOI) / Purchase Price
For example:
Annual Rent = $50,000/year
Operating Expenses = $20,000/year
(*note: Operating Expenses do not include mortgage payments)
NOI (Net Operating Income) = $50,000 - $20,000 = $30,000.
Purchase price = $500,000
Cap rate = ($30,000/$500,000) X100% = 6%
Final Thought
Is this a good investment?
Well it depends! It depends on the property (class A, B, etc), the condition, the location, and the type.
All invesments involved risk so best to consult professionals before making any purchase.
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