| What is a cap rate? Whenever searching for an | | | | better of course. The reason for this is that if the |
| investment such as a stock, currency, commodity, real | | | | interest rate exceeds the return, then you are |
| estate, or any other type of investment, typically an | | | | essentially paying for every percentage point past |
| important factor is what is my return on investment? If | | | | your return on that mortgage. It means you lose |
| you're new to the real estate game or trying to learn | | | | money, typically a lot. |
| more you probably have not heard of a cap rate or | | | | Thus, it is best to always have a return that is much |
| have, but don't quite understand what it means. This | | | | higher than the interest, not always possible, but best |
| article will discuss what a cap rate is and what a bad | | | | to aim for it. You probably now can figure out what a |
| cap rate is and what a good cap rate is. | | | | bad cap rate is based on what I have just discussed, |
| To start, simply put, a cap rate is just a return on | | | | but I would like to add one thing. We now have |
| investment. It applies to any real estate investment you | | | | established what a good cap rate is and what is bad. |
| may be considering and the cap rate will help you | | | | This does not mean go and buy any investment |
| determine if the investment is worthwhile. To calculate | | | | property that is less than the return. You must make |
| the return you must take the net operating income and | | | | sure that there is a reasonable safety net, for example |
| divide it by the price you pay for the property, and | | | | an interest rate of 5.8% and a return of 8%. |
| then multiply it by one hundred. That will give you the | | | | In the real estate business you must realize there is a |
| percentage of return for the investment property. | | | | possibility of vacancies, there are unexpected costs, |
| The next question, how do I know what a good return | | | | and more. If any of your costs end up exceeding |
| is? Well, the answer to that question is it depends on | | | | expectations or you have a vacancy, the property will |
| certain variables. The most important concern for any | | | | quickly result in a negative cash flow. Thus, you will be |
| deal should be that the return is greater than the | | | | spending money to keep your property a float. In |
| interest rate of your mortgage. For example, if you | | | | some cases it may be best to work with a partner so |
| have a property that has an 8% return and you are | | | | there is more cash involved in the deal to reduce risk |
| looking at mortgages for the property. It is best to | | | | of losing money in a deal. |
| have a mortgage below 8%, ideally the lower the | | | | |