If you've ever looked into buying an investment property, you've probably heard of the term capitalization rates, or cap rates.
That leaves you with a lot of questions, however- what are cap rates? What is a good cap rate? Can specialists help you when it comes to cap rates?
If any of these questions have crossed your mind, then you've come to the right place. In this article we'll answer all of the questions we've addressed and more.
All you need to do in order to learn about cap rates and how they affect investment property is keep reading.
What Are Cap Rates?
Cap rate is a term most commonly used in commercial real estate- that is, real estate properties that can be leased for money.
This is a measure used to guess and compare how much the rate of return is on a given property. Essentially, it helps people with interest in real estate investing figure out how long it will take before they will gain profit by purchasing a property.
Cap rates can be calculated by dividing a building's net operating income by the property asset value. Once you have your answer, all you need to do is convert it into a percentage. You can find many different cap rate calculators online to help you with the math.
Cap rates are also determined by how much risk the building has compared to other properties.
Are Cap Rates Trustworthy?
Although cap rates are a useful measurement to go by, they are not the only factor you should be using by a long shot. In addition, it's important to know that cap rates can change depending on several factors.
You should always try to get a cap rate, true, but you need to know when to use it and when to discard it. You'll also need to consider other factors before investing in a specific property. Considering all angles about a property is the best thing you can do for yourself, measurements or not.
In the end, the only one who can decide if a certain investment property is worth it is you. You need to know that you won't always have a quick rate of return.
What Is a Good Cap Rate?
There's no one cap rate that's considered "good", but many people agree that you want a capitalization rate of five to ten percent. This usually promises a higher rate of return, although it also means there's a somewhat high risk of investing in the property.
A cap rate of four percent is less desirable than a cap rate of five to ten percent. This is because, although it has less risk, there is also a lower rate of return. It will take you longer to get back the initial investment that you made in the property.
You need to decide what a good cap rate is to you personally. If you're willing to accept the higher risks, then you might want to go with a rate of five percent or more.
How Can Cap Rates Change?
Interestingly enough, the factors that affect cap rates are the same things to know before investing in a property.
The biggest factor is the location of the property. You want it to be located in a desirable area of town, with any necessary places such as the grocery store within driving distance.
You'll also want to be aware of nearby amenities such as parks or restaurants. Being closer to these can make a property more desirable and affect the cap rate.
Lastly, you'll need to consider what type of property you have. There's a big difference between a small house and a decent-sized house with a large yard.
When to Use Cap Rates
Knowing when to use cap rates is important to master. The number one thing you need to know is you should not use cap rates as the main factor in whether to invest in a property or not.
In specific, cap rates are usually only good for an estimate. They tell you how high-risk one property is compared to another. They're one of the first things you figure out and a rather small factor to keep in mind.
Another thing that cap rates are useful for is looking at a market to determine which way it is going. Sometimes cap rates will be indicative of a trend, which will help you decide what to do.
Overall, cap rates can be useful. But they shouldn't be the one thing you rely on.
Cap Rates and Specialists
If you're thinking about receiving advice from investment property specialists, then you should absolutely ask your specialist about cap rates.
An investment property specialist will know even more about cap rates than this guide can tell you. A specialist will be able to give you more advice on when to use them and the current factors that change cap rates.
If you have a specific property in mind that you're thinking about turning into an investment property, talk to a specialist. They will tell you if it's a good idea to use that property or if you should be looking at using or acquiring other properties.
In addition to advice about cap rates, investment property specialists can help you with a wide variety of things. Consulting with a specialist is always a good idea!
Reach Out to Us
Now that we've answered the question "What is a good cap rate", are you prepared to begin looking into investment property? Do you have more questions or concerns?
If the answer to either of these is "yes", then you should think about reaching out to us! Simply fill out the form and we'll get in touch with answers as soon as possible.
Bottom Line Property Management is dedicated to giving you the best service possible. So let us help you- reach out to us today!
