What is a Cap Rate?

By chrisrath • August 29th, 2012

A Cap Rate (Capitilization Rate) is essentially a ratio between your net operation income that’s given off by an asset and the capital cost or also known as, the price you originally paid to obtain the asset in the first place. The cap rate is basically figured out by a simple formula:

Annual net operating income over the cost or value.

In our current economy and market, the cap rate of the property or asset is something that should be taken into account because of how fluctuating the housing market currently is.

What Is A Rate That I Should Be Shooting For?

Commonly, people like to shoot for 10%. Price reductions and the massive amount of foreclosures especially make this easy to obtain. There are some areas however that have cap rates as low as 7% such as Toronto and other parts of Canada. It really depends on the area you’re looking to invest into, the market you’re investing into and the general economy of the area. As a whole, the economy is currently in a slump and nothing’s certain for the moment.

As a realistic figure, you can expect 10% to be an achievable goal unless you’re going into retail investment. Retail has a much different number and as of 2012, the small retail market is suffering greatly. No one is certain on how long the small retail market will last at a profitable number but right now the best bet for investment is to buy into forclosed houses in decent areas. Stay away from projects and ghetto type areas as you’ll only see loss and you generally won’t be dealing with your ideal type of people if you decide to rent out these kinds of properties.

As a whole, your capitilization rate should be expected to hit around 10% or so.

About the author

chrisrath I enjoy helping people find that right home whenever faced with a relocation situation due to their job or even a major life event. Since I have access to a large inventory of homes for sale and also manage many properties in the northern Delaware region, it is easy for us to help anyone make a smooth transition into this area. I am a licensed Real Estate Agent and also manage my own company Rath Management where we locate, screen, secure, counsel, and communicate with the tenant and the investor throughout the entire leasing process to keep homes filled. Our company also manages maintenance issues, collects and forwards rent monies, and even helps with the dreaded eviction process in the event a tenant does not keep up with the terms. Chris Rath

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