The real estate investors must know to determine the value at the time of purchasing the property. In order to do so, he must know the capitalization rate, in addition to that there are different mathematical methods used by the investors to analyze the performance of the properties
Zack real estate reviews talks about how to calculate Capitalization rate, its uses, pros and cons.
To calculate the capitalization rate, net operating income and properties sold off-late are considered so as to calculate the current price. This method is very much preferred as it is easy to compare similar properties. Capitalization rate is an income property valuation method and it is important for new investors as it helps their economic growth. The investor must also consider the net operating income (NOI) because it should not exceed your cash flow and profit. Capitalization rate is known as cap rate.
The two ways to use and determine cap rate are
- To determine the price of the property while selling using the current cap rate.
- Used while purchasing a property, cap rates are considered while asking price has to be decided.
When you are comparing similar properties which has been sold in your area recently, it is difficult to find NOI as it may or may not be published in the listing. At that time, real estate agents can help you out. Cap rate can be calculated after getting the NOI of different properties. This is done so as to get the best deal while you purchase a property.
When the investor wants to buy a property, he always thinks whether it is worth to invest. He even thinks whether the seller is giving a correct price or overpriced.
Pros:
CAP rates are widely used in commercial properties as well as multi-family properties. Cap rate is the rate of return on a real investment property based on the generation of the income of the property and it is used to estimate the investor potential return.
It is helpful as it streamlines the real estate investment and used to track it to check on the performance measure. When cap rates start declining, it is better to sell off the property and re-invest somewhere else which would give you either cash flow or good returns.
It is a good tool to compare the properties quickly, find better deals and make wise investments.
Investors prefer low cap rate while making an investment, whereas during potential investment cap rates of different investments are compared with personal cap rate.
Cap rates are helpful in determining the payback period as some investments take a pretty long time to complete.
Cons:
They are not preferred for short term investments. Cap rate is sometimes termed as NOI/Original price, this is not suitable when property is given as gift or inherited property as cap rate will be zero.
How to calculate the current price?
Divide the net operating income by cap rate.
In other words, cap rate= NOI/current value
NOI/CAP RATE
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Interested investors can visit Zack Childress quick REI cash System which has many more articles in detail about Cap rate.
