Before you get into the discussion about what constitutes a good cap-rate, it is worth reviewing how to calculate this metric.
For investors, the question is: What is a good caprate for real estate properties? What is a good cap-rate for multi-family real estate properties? The following five facts will help you determine if your investment is worth it.
You want a higher caprate when buying an investment property. Higher cap rates will bring you a higher annual return. If you want to make at most a percentage of your investment's income each year, that should be the driving factor behind your decision to invest. Divide your estimated net income by the target cap rate to calculate the price you would be willing to pay to purchase a property.
The cap rate of a property can't be calculated if it's being rented out, flipped, or offered as a vacation home. The cap rate's 12-month time frame is less important when flipping a property. Short-term vacation rentals and short-term rentals will see swings in income, occupancy, as well as operating expenses that fluctuate because of seasonal maintenance or repairs due to high tenant turnover. These factors all affect your net operational income, which results in an unpredictable cap rate calculation.
Also, the cap rates are calculated assuming that you pay cash for a property and not take out a mortgage. The cap rate does not include interest or points paid. It does not include any other costs associated with the acquisition of the property such as closing costs and broker's fees.
The capitalization ratio is an important part of the deal. Many real estate syndicators in multifamily realty would argue that the capitalization rates is as important than the net operating income. It's even more important than the purchase price. This metric helps you determine the property's value and whether it is worth investing in.
The "caprate" that you should buy depends on where you live and what return you need to make your investment worthwhile. This means you will need to evaluate your tolerance for risk. For example, professionals buying commercial properties might opt for a 4% cap in high-demand areas that are less risky, but may prefer a 10% cap in low-demand areas. It is reasonable to expect to earn 4% to 10% annually for your investment property.
