Mary & Dick's Blog

FAQ#5 - What's a CAP Rate and Why Do I Care?

If you're actively investing in real estate, you know that a cap rate is a measure of the rate of return you might expect from an investment property. Simply stated, it is the annual net operating income divided by the market value of the property:

CAP Rate

As an example, suppose that you purchased a rental home for $200,000, and that based on a monthly rent of $1500, your annual net income was $15,500 after expenses. Your cap rate would be 7.75%. Note that in figuring cap rates, net operating income is defined as earnings before depreciation and interest expense.

Cap rates can also provide some insight into valuing a property based on its income generation potential:

Market Value

Cap rates are simple enough, but that's also their limitation. While CAP rates can be easily and quickly generated and are good for quick comparisons between income properties, they have limited utility as a tool for evaluating the real worth of an investment.

EvaluationIf you have found an investment property to which you would like to give some serious consideration, let us know. We have a very useful investment spreadsheet that we'd be happy to share with you. It's easy to use and will give you a much more detailed look at how an investment may perform, based on your input of detailed property and financial data. And while it's a bit more effort than simple division, it will give you the kind of information you need to determine how a potential investment will fit with your criteria and goals.

Mary & Dick

Mary & Dick Greenberg
New Paradigm Partners LLC
2601 S. Lemay Ave. #41
Fort Collins, CO 80525
970-689-4663
www.maryanddick.com

 

Data Source: IRES MLS

Comment balloon 21 commentsDick Greenberg • May 30 2012 02:39PM
FAQ#5 - What's a CAP Rate and Why Do I Care?
share
If you're actively investing in real estate, you know that a cap rate is a measure of the rate of return you might expect from an investment property. Simply stated, it is the annual net operating income divided by the market value of the property:.. more
FAQ#4 - Why Aren't You Advertising My Home In The Newspaper?
share
Newspaper advertising used to be the backbone of real estate marketing. The weekend papers used to have huge real estate sections, with all of the local companies represented. If you look at your weekend paper today, you'll probably notice that all… more
FAQ#3 - Who Pays The Real Estate Agents?
share
Believe it or not, the answer to this question isn't obvious. It all depends on what perspective you choose when you ask it. Let's look first at the simple answer: When a seller hires an agent to help sell his home, he generally agrees to pay… more
FAQ#2 - Open Houses
share
Why do agents at open houses always ask me if I'm working with anyone? There are two answers to this question. Let's start with the logical one: If you are working with another agent, the open house agent will know to extend professional… more
FAQ#1 - Buyer's Market or Seller's Market?
share
Local real estate markets are commonly characterized as "buyer's" or "seller's" markets, to describe which party is enjoying the current real estate climate more. The underlying concept is one of balance. When there aren't… more
New Houses in Greeley CO - May 2011 Market Segment Report
share
This is the May 2011 Market Segment Report for New Houses in Greeley CO New homes featuring the latest developments in modern design concepts and features, along with innovative approaches to architecture, continue to create interest with… more
Greeley CO Luxury Real Estate - May 2011 Market Segment Report
share
Here is the May 2011 Market Segment Report for Greeley CO Luxury Real Estate If you're in the market for a high-end home, you'll find some excellent opportunities, as well as great bargains, in the current market for luxury homes in the… more
Houses with One Plus Acres for Sale in Greeley CO - May 2012
share
This is the May 2012 Market Segment Report for Houses with One Plus Acres for Sale in Greeley CO Houses with One Plus Acres for Sale in Greeley CO may be the perfect answer if you're in the market for a bit more elbow room, some peace and… more
Townhomes for Sale in Greeley CO – May 2012 Market Segment Report
share
This is the May 2012 Market Segment Report for Townhomes for Sale in Greeley CO You will be interested in the townhomes condos and 1/2 duplexes for sale in Greeley CO if you have a need to downsize to a more manageable home with low… more
5-Bedroom Houses in Greeley CO – May 2012 Market Segment Report
share
This is the May 2012 Market Segment Report for 5-Bedroom Houses in Greeley CO 5-bedroom houses may be the perfect answer for homebuyers needing some extra bedrooms for a growing family, a home office or craft room, or guest accommodations… more