For those who are new to investing in real estate, the cap rate (short for capitalization rates) is an important metric we use when forecasting our property's return on investment. This is simply the ratio between your property's original capital cost and its current value.
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.
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.
Cap rates are generally higher for riskier investments. A high caprate means that your asset prices are low, which can indicate a riskier investment. However, it is important to compare market caps rates in your region as they can be very different.
How can you tell if your realty investment is a failure or a success? It's as easy as Cap Rate.
Also, the cap rate allows us to calculate how much profit is made on our property's actual value. Real estate investors will need to know this information in order to accurately forecast our ROI and determine if operating costs are making the investment unprofitable.
You should be cautious. If you don't have the financial resources to accept excessive risk, then a property with high cap rates might not be the best option for you.
