The capitalization rate (cap rate) is the ratio between the net operating income produced by a property and the original price you paid, expressed as a percentage. Does that sound a little complicated? Don’t worry let’s dig in and I’ll keep it real world and simple.

Assume you buy a $100,000 property renting for $1,000 per month

Let’s assume you are looking at an investment property with a purchase price of $100,000. You’ll have some purchasing costs like an inspection report and title insurance but lets keep it simple and assume a total cash investment of $100,000. This property is rented for $1,000 per month so we know your projected rental income.

 

Estimate your expenses

Let’s look at this property’s expenses broken down into a monthly view. The annual property tax is $1,000 (verified online with local county records) and is budgeted at $80 per month. Your landlord annual insurance premium is $550 for dwelling coverage and personal liability, and is a $45 per month expense. Your property manager charges 10% of gross rent received, so that’s $100 per month. Lets assume $50 per month for repairs and one month a year for a vacancy rate say $80 per month. So that’s $355 per month.

 

Calculating Your Net Operating Income

So now that we have your projected income and expenses we can calculate your Net Operating Income (NOI). Your income is $1,000 per month and expenses are $355 so your Net Operating Income is $645 per month and $7,740 per year. Cap rates measure the annual net operating income produced by a property as a percentage of the original price paid. In this case it’s $7,740 divided by $100,000, which is a 7.7% return.

 

See Measuring Return: Cap Rates and Cash on Cash

www.howmanydoors.com/members-home/education-center/quick-start-guide/measuring-return-cap-rates-and-cash-on-cash/

Prices appear to be the most suppressed in markets with more foreclosures. These tend to be states with a judicial foreclosure process. The foreclosure process varies by state, and depends on whether the state uses the court system to file a foreclosure. The judicial foreclosure process requires court action on a foreclosed home and can take a very long time. The real estate crisis created a big opportunity to buy distressed properties and there are still many foreclosure sales in judicial foreclosure states.

See Where to Find Foreclosures in 2015 www.howmanydoors.com/members-home/education-center/find/finding-foreclosures/

It’s big. It’s ginormous! According to studies there are approximately 20 million housing units in the single-family rental market. These units are defined as properties with between one and four units. This number represents just over half of all rental units in the USA. With average home prices at around $195,000 that’s almost 4 trillion dollars

There are just over 43 million renting households with around 104 million residents occupying them in the US today. That’s about a third of the population and is growing as we added over one million renting households since the 2008 housing crisis that highlighted the many advantages of renting.