What is the general rule of thumb regarding cap rates? Cap rates for better neighborhoods are lower and those in less desirable areas tend to be higher. If you see a property with a 15% cap rate, it is likely not in a great location.
Now the question is: How can I tell if my property performs beyond a cap-rate? Although there are many different ways to gain a global view about your investment performance, advanced investors need to automate as much of it as possible.
Mortgage expenses are not included in the cap rate. This is advantageous because it allows for more precise analysis without factoring in financing (terms and interest rates, etc.). This means that it is focused on the property only and doesn't factor in financing.
Your time is your most precious resource. It's crucial to use automation and systems wherever possible to produce the reports you need in order to evaluate how your properties are performing. Automated income- and expense tracking, for example, will automatically categorize expenses to allow you to quickly calculate NOI. This allows to more accurately calculate cap rate in your market.
Also, the surrounding buildings have an impact on cap rates. Two buildings located in the same neighborhood might have different cap rates. One that was updated recently may be valued at a 5 percent cap while the other one is worth renovating at a 7 percent cap.
The difference between caprate and cash-on–cash returns is something I see many new investors get confused about. Let me clarify... they do not match each other. You can get a cap rate to match your cash on cash return if you own a property, but they are very different calculations.
The cap rate for a property is the same regardless of financial status. This helps you benchmark profit potential consistently and accurately, while also allowing you to keep your investment portfolio in check. Cap rate is essential if you want to build wealth.