Take care. If you're not able to bear excessive risk, you might not want to invest in property with a high-cap rate.
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.
The higher the cap rate, generally speaking, the more risky the investment. The cap rate is an indicator that your asset value is low. This can lead to higher risk investments. It is important that you compare the market cap rates for your area as they can vary greatly.
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.
We can also determine the profit percentage of our property by using the cap rate. This information is crucial for real estate investors as it allows us to see if our ROI forecasts are being met and if our operating costs make our investment unprofitable.
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.
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.
