what is considered a good cap rate for rental property
Before we get into the discussion of what makes a good rate, let's first review how this metric is calculated!
Investors need to know what a good caprate in real estate is. To go further, what is the best cap rate for multifamily properties in real estate? These are five facts you should know about the cap rates so that you can decide if your potential investment is worthwhile.
A higher cap rate is a must when you are looking to purchase an investment property. A higher cap rate will result in a better annual return. You should aim to earn at least a certain amount of income from your investment each year. To determine the price that you are willing to pay for a property, divide your net income by your target rate.
Before we get into the discussion of what makes a good rate, let's first review how this metric is calculated!
The deal's capitalization rate is a key component. Multifamily real estate syndicators will argue that the capitalization ratio is as important and important as net operating income, or even the purchase price. In fact, it's how you calculate it! This metric determines the value of a property and ultimately whether you should invest in it.
The location of the property and the return required to make it worthwhile will determine the "cap rate" at which you should purchase. You will need to assess your risk tolerance. Professionals buying commercial properties might choose to buy in high-demand, less risky areas at a 4% rate, while they would prefer a 10% cap rate in low-demand, more profitable areas. A reasonable range for earning investment property income is between 4% and 10% per annum.
The cap rate assumes that you are paying cash for the property and not taking out a loan. It doesn't include any mortgage costs, such as interest and points paid. It doesn't include closing costs or broker's fees.
If you plan to sell the property, rent it out as a vacation rental or flip it, it is not necessary to calculate the cap rate. You want to keep the property for as little time as possible when you flip it. This makes the 12-month reference period of the cap rate less relevant. You will likely experience fluctuations in income and occupancy for vacation rentals or short-term rentals. Operating expenses may also fluctuate due seasonal maintenance or repairs caused by high tenant turnover. All these factors can affect your net operating income which, in turn, results in a unreliable cap-rate calculation.