This cap rate DOES NOT include mortgage expenses. This is beneficial as it provides a more accurate analysis of the property without taking into account financing (terms, interest rate, etc.). The property is the focus of the analysis, without financing.
Your surrounding buildings also have an effect on your cap rate. The cap rate of two buildings in the same vicinity can be affected by their proximity. If one building was recently renovated, it might trade at a cap of 5%, while the one in need may trade at an average cap of 7%.
Because time is our most precious asset, automation and systems are essential to help you understand the performance of your properties. Automated income/expense tracking, for instance will automatically classify your expenses to make it easy to calculate NOI. This will allow you to accurately calculate market cap rates.
No matter what your financial situation is, the cap rate on a property will not change from one investor to another. This allows you and your investors to accurately benchmark your profit potential. If you're serious about building wealth, the cap rate is something you must master.
Take care. If you're not able to bear excessive risk, you might not want to invest in property with a high-cap rate.
Many new investors are confused by the difference between caprate or cash-on cash return. Let me clarify... they're not the same. While a cap rate can be used to match cash-on-cash returns if you purchase property without financing, it is not the same calculation.
The question now is how can I find out if my property is performing beyond just a caprate? While there are many methods to obtain a global view, the best way to do so is automating as much as you can.
