Lubavitch Real Estate Blog

Posts Tagged ‘Investment property prospect’

Purchasing an investment property is a great way to increase net worth over time with the added benefit of cash flow from rental income. How do you know which investment property is the best buy compared to others on the market?

There are a few simple calculations one can make to value their investment property prospect. Below are details on how to calculate Capitalization Rate, or Cap Rate as well as another comparison metric called Cash on Cash Return.

1. The first step is to identify the market value of a property. This value can also be the purchase price one expects to pay for the property. A Realtor, home appraiser or tax consultant can help determine a properties value if the potential home is not already listed for sale.

2. The next piece of information needed is the Annual Net Operating Income (NOI). This is calculated by taking the expected rental income from the property over a 12 month period, and subtracting off any costs associated with keeping the home rented for that same 12 month period.

Typical costs include property taxes, management fees, expected repairs and maintenance costs, and insurance. Do not include mortgage payments as part of the cost, since Capitalization Rate is used to compare properties to each other as if they were purchased with cash. This provides a more accurate comparison.

3. To calculate Capitalization Rate, or Cap Rate, you divide the Annual Net Operating Income by the purchase price or market price of the property. Cap Rate = Annual NOI / Purchase Price. For example, if the Annual NOI of a particular property is $12,500 per year (Rent income minus cost to maintain the property), and the purchase price of the property is $150,000, the Cap Rate would be 8.3%. Read the rest of this entry »