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Buying cash flow properties is one of the greatest ways to build wealth. To do this right, you have to buy smart. Run your numbers, that’s what we say. But how do I exactly do that? This is what we are going to explore. A good way to do this is to determine the Capitalization Rate of the property (Cap Rate in short).

Capitalization Rate is a crucial indicator for real estate investing because it measures the rate of return on your investment, i.e. how much you get for your money’s worth. However, surprisingly, this concept is often misunderstood within the investment circle. If you ask 10 people what the Cap Rate is for a particular property, nine out of the 10 people will give you a different answer. The last one will ask, “What is cap rate again?”

So, what is Cap Rate is all about, how and when you will use Cap Rate to analyze your deal, and why different people calculate Cap Rates differently. Learning to calculate and understand Cap Rate is a powerful tool for your real estate investing career.

What is Cap Rate?

In plain English, Cap Rate can be described as such:

If you purchase an investment property ALL IN CASH, for each $100 you put in, how much is your profit per year after you have paid your expenses?

The keywords are: “cash,” “profit per year,” and “after expenses.”

  • CASH: It assumes cash, i.e. we don’t consider how a mortgage may change our return.
  • PROFIT PER YEAR: It assumes there is regular income generated from this property.
  • AFTER EXPENSES: It assumes there are expenses being associated with this property.

Often, Cap Rate is represented in percentages. For example, instead of saying Property A’s Cap Rate is $7.50 per $100 invested, we will just say Cap Rate is 7.5%. It means the same thing.

How is Cap Rate Used?

Cap Rate is mostly used to compare income-producing properties. It gives a unified gauge for you to compare, even if the properties are somewhat different.

DEVELOPERS

Derek is an expert at matching developers with properties that are ideal for rehabilitation or new construction. With unique approaches to marketing new construction property that garners unprecedented results for clients.

ADDING TO PORTFOLIO

Derek has become a master at finding opportunity in a saturated market. He is a firm believer that you make your money when you buy and his track record is unrivaled in the Orange County Market place. Saving his buyers 17%+ on each transaction or $170,000 per 1m spent.