For every real estate investor, the cap rate real estate is one of the crucial metrics to follow.

By calculating the property cap rate, you can ensure that you’re securing the best investment property deal for your circumstances. In order to better understand the cap rate in real estate, keep on reading.

What Is Cap Rate in Real Estate?

A cap rate in real estate, also referred to as capitalization rate, is the ratio of net operating income (NOI) to the value of the property asset. In that sense, the cap rate formula would look like this: NOI/purchase price = cap rate.

NOI shows the potential income earned from the property in question within a period of one year, minus all the operating costs and expenses. In the case of renting an entire apartment building, the NOI would include the income from the tenants’ rent payments minus all the expenses related to taxes, building upkeep, etc.

The cap rate formula in real estate is not only useful for checking a specific property, but also when it comes to the entire market in case you’re looking to invest in a group of properties. However, it’s important to mention that mortgage expenses are not included in the cap rate formula.

The commercial cap rate in real estate also differs from the residential one. The value of the first is largely based on the potential return on investment while the latter is determined by the price per square foot in regards to similar properties. Also, the cap rate in real estate is not fixed; quite the contrary, it will fluctuate based on the property class, interest rates, and product availability.

How to Calculate the Cap Rate in Real Estate

Investors have the option to purchase properties either with loans or cash. The cap rate automatically considers cash as the main purchasing means in order to present the baseline rate of return, with no regard to interest rates or loan repayments.

We already mentioned the cap rate formula, namely NOI/purchase price = cap rate. This is the “traditional” way to calculate it. To make this clearer, we’ll use an example. For instance, if the property you’re interested in is listed at $500,000 and its NOI is $75,000, the formula would place the cap rate at 15%, i.e. 75K/500K = 0.15.

Of course, there’s a considerably more efficient way to calculate the cap rate in real estate. Mashvisor’s cap rate calculator is a rather nifty tool that can considerably minimize the challenges and risks of your investment analysis.

What’s more, the tool is created to make things easy for both beginners and experts alike when investing in real estate is concerned. It only takes a couple of minutes to get detailed info on the real estate cap rate and more. That way, you can be 100% certain that you’re making the best possible decision and maintaining authority in the competitive market.

How to Calculate the Cap Rate Real Estate?

Mashvisor’s calculator can be found in every listing page. This helps investors determine the profitability of the for-sale property that they are viewing before deciding on whether to buy it.

Why Use a Cap Rate in Real Estate Investing

To put it simply, calculating the property’s cap rate will provide you with an insight into the actual property opportunity and its value. For instance, if the cap rate suggests 15%, it’s reasonable to assume that the return will also be around 15%.

If you’ve been wondering how to invest in real estate, keep in mind the benefits of different cap rates. Based on their risk tolerance, most investors will opt to go with cap rates in different ranges. That said, when a cap rate is lower, the property is likely stabilized within an already proven market. On the other hand, when a cap rate is higher, chances are that the property in question may have some issues such as desirability and maintenance, but it can also come with higher upside potential.  

A different cap rate in real estate investing also comes with different methods of acquisition. The most common options include light debt, heavy debt, and all cash. Regardless of the method, the cash flow is bound to change while the throw-off of the property’s annual revenue will remain the same.

That said, using a cap rate in real estate is an efficient way to quickly calculate potential cash flows of different properties of interest, allowing the investors to compare them with the most lucrative opportunities in mind.

When to Use a Cap Rate in Real Estate

As mentioned, cap rates can be rather useful for real estate investors who are looking to evaluate potential value and risks in regards to several different properties they have their eye on. When it comes to other decisions in regards to real estate investing, cap rates may not be the most helpful metric available. Of course, aside from cap rates, there are other metrics that can also provide some insight into the potential risks and returns of an investment property.

If you’re looking to invest in commercial properties, don’t hesitate to make the most out of cap rates. However, this particular formula is not ideal when it comes to evaluating properties you plan to flip, ones with an irregular stream of income, or single-family homes.

Related: How to Evaluate an Airbnb Investment

What Is a Good Cap Rate in Real Estate?

It’s essential to understand that we cannot talk about a universally good cap rate, and a certain cap rate number won’t be ideal for every type of property. Investors mostly use the cap rate in real estate to see whether a certain property fits into their own comfort levels.

In general, a higher cap rate indicates higher NOI and lower valuation of a property, while a lower cap rate indicates lower NOI and higher valuation. Properties with lower cap rates are usually linked to lower risk, but this also suggests that it might take longer to get the initial investment back. 

This is why it’s crucial not to rush and thoroughly analyze the best cap rate for your investment portfolio. When you have a number in mind that suits your particular circumstance, it will be easy to pick and choose among different properties based on that, and actually have a “good” cap rate for you personally.

10 Highest Cap Rate Cities for Traditional Rental Properties

It’s no secret that traditional rental properties are the most profitable path to take when easing your way into real estate investing. Essentially, these provide value both short- and long-term, namely through rental income and real estate appreciation. Also, it’s always possible to get a professional property manager and start earning a passive income this way.

In order to secure yourself the best possible deal when investing in real estate, the go-to practice should be to locate the most lucrative locations for the matter. If you’re wondering what’s the best place to buy rental property, we at Mashvisor have come up with a top 10 list of the cities with the highest traditional cap rate in 2022. We’ve used the real estate and rental data in the US residential estate market in order to have our algorithms calculate the by-city cap rates and provide you with the 10 highest ranked locations in terms of the most valuable long-term rental opportunities.

1. Spruce Pine, NC

  • Monthly Traditional Rental Income: $4,451
  • Traditional Cash on Cash Return: 9.78%
  • Traditional Cap Rate: 9.98%
  • Price to Rent Ratio: 8
  • Number of Listings for Sale: 16
  • Median Property Price: $448,018
  • Walk Score: 47

2. Suwannee, FL

  • Monthly Traditional Rental Income: $1,373
  • Traditional Cash on Cash Return: 9.32%
  • Traditional Cap Rate: 9.97%
  • Price to Rent Ratio: 21
  • Number of Listings for Sale: 8
  • Median Property Price: $350,938
  • Walk Score: 18

Related: 20 Best Places to Invest in Real Estate in Florida in 2022

3. Presidio, TX

  • Monthly Traditional Rental Income: $1,365
  • Traditional Cash on Cash Return: 9.20%
  • Traditional Cap Rate: 9.79%
  • Price to Rent Ratio: 15
  • Number of Listings for Sale: 6
  • Median Property Price: $240,000
  • Walk Score: 53

4. Saxonburg, PA

  • Monthly Traditional Rental Income: $720
  • Traditional Cash on Cash Return: 8.55%
  • Traditional Cap Rate: 9.67%
  • Price to Rent Ratio: 7
  • Number of Listings for Sale: 9
  • Median Property Price: $62,344
  • Walk Score: 38

5. Alturas, CA

  • Monthly Traditional Rental Income: $3,152
  • Traditional Cash on Cash Return: 8.90%
  • Traditional Cap Rate: 9.14%
  • Price to Rent Ratio: 7
  • Number of Listings for Sale: 13
  • Median Property Price: $271,954
  • Walk Score: 53

6. Sylacauga, AL

  • Monthly Traditional Rental Income: $1,414
  • Traditional Cash on Cash Return: 8.47%
  • Traditional Cap Rate: 8.98%
  • Price to Rent Ratio: 19
  • Number of Listings for Sale: 8
  • Median Property Price: $319,975
  • Walk Score: 60

7. Waterville Valley, NH

  • Monthly Traditional Rental Income: $9,810
  • Traditional Cash on Cash Return: 8.62%
  • Traditional Cap Rate: 8.70%
  • Price to Rent Ratio: 7
  • Number of Listings for Sale: 6
  • Median Property Price: $869,900
  • Walk Score: 21

8. Hillsville, VA

  • Monthly Traditional Rental Income: $1,150
  • Traditional Cash on Cash Return: 7.81%
  • Traditional Cap Rate: 8.35%
  • Price to Rent Ratio: 24
  • Number of Listings for Sale: 12
  • Median Property Price: $328,600
  • Walk Score: 59

9. Hibbing, MN

  • Monthly Traditional Rental Income: $1,314
  • Traditional Cash on Cash Return: 7.60%
  • Traditional Cap Rate: 8.17%
  • Price to Rent Ratio: 9
  • Number of Listings for Sale: 10
  • Median Property Price: $135,100
  • Walk Score: 60

10. Gallipolis, OH

  • Monthly Traditional Rental Income: $1,459
  • Traditional Cash on Cash Return: 7.72%
  • Traditional Cap Rate: 8.17%
  • Price to Rent Ratio: 10
  • Number of Listings for Sale: 8
  • Median Property Price: $166,638
  • Walk Score: 59

10 Highest Cap Rate Cities for Airbnb Rental Properties

Aside from traditional rental properties, purchasing a vacation rental is also a good start to your investment journey in 2022. That said, Mashvisor also prepared a list of the top 10 cities with the highest Airbnb cap rates.

Note: The following list is based on Mashvisor’s analysis, which is based on data gathered from Airbnb and other primary sources. We did not include legalities surrounding short-term rentals in our consideration, so please make sure to call the local authorities to verify that Airbnbs are allowed in the area.

1. Jennings, LA

  • Number of Airbnb Listings: 9
  • Monthly Airbnb Rental Income: $3,363
  • Airbnb Cash on Cash Return: 9.62%
  • Airbnb Cap Rate: 9.95%
  • Airbnb Daily Rate: $80
  • Airbnb Occupancy Rate: 55%
  • Number of Listings for Sale: 16
  • Median Property Price: $255,081
  • Walk Score: 63

2. Dunmore, PA

  • Number of Airbnb Listings: 15
  • Monthly Airbnb Rental Income: $2,404
  • Airbnb Cash on Cash Return: 9.28%
  • Airbnb Cap Rate: 9.74%
  • Airbnb Daily Rate: $162
  • Airbnb Occupancy Rate: 65%
  • Number of Listings for Sale: 6
  • Median Property Price: $197,300
  • Walk Score: 79

3. Marmora, NJ

  • Number of Airbnb Listings: 8
  • Monthly Airbnb Rental Income: $6,408
  • Airbnb Cash on Cash Return: 9.39%
  • Airbnb Cap Rate: 9.55%
  • Airbnb Daily Rate: $235
  • Airbnb Occupancy Rate: 64%
  • Number of Listings for Sale: 8
  • Median Property Price: $468,138
  • Walk Score: 48

4. Wolverine Lake, MI

  • Number of Airbnb Listings: 5
  • Monthly Airbnb Rental Income: $4,142
  • Airbnb Cash on Cash Return: 8.89%
  • Airbnb Cap Rate: 9.12%
  • Airbnb Daily Rate: $122
  • Airbnb Occupancy Rate: 65%
  • Number of Listings for Sale: 6
  • Median Property Price: $581,367
  • Walk Score: 2

Related: Michigan Housing Market Forecast 2022

5. Matamoras, PA

  • Number of Airbnb Listings: 6
  • Monthly Airbnb Rental Income: $5,981
  • Airbnb Cash on Cash Return: 8.94%
  • Airbnb Cap Rate: 9.11%
  • Airbnb Daily Rate: $879
  • Airbnb Occupancy Rate: 63%
  • Number of Listings for Sale: 34
  • Median Property Price: $382,632
  • Walk Score: 57

6. Horn Lake, MS

  • Number of Airbnb Listings: 11
  • Monthly Airbnb Rental Income: $3,172
  • Airbnb Cash on Cash Return: 8.79%
  • Airbnb Cap Rate: 9.08%
  • Airbnb Daily Rate: $149
  • Airbnb Occupancy Rate: 64%
  • Number of Listings for Sale: 10
  • Median Property Price: $267,744
  • Walk Score: 44

7. Centerville, OH

  • Number of Airbnb Listings: 21
  • Monthly Airbnb Rental Income: $6,215
  • Airbnb Cash on Cash Return: 8.87%
  • Airbnb Cap Rate: 9.03%
  • Airbnb Daily Rate: $204
  • Airbnb Occupancy Rate: 61%
  • Number of Listings for Sale: 5
  • Median Property Price: $456,032
  • Walk Score: 59

8. Winneconne, WI

  • Number of Airbnb Listings: 6
  • Monthly Airbnb Rental Income: $2,770
  • Airbnb Cash on Cash Return: 8.68%
  • Airbnb Cap Rate: 9.03%
  • Airbnb Daily Rate: $391
  • Airbnb Occupancy Rate: 46%
  • Number of Listings for Sale: 7
  • Median Property Price: $431,929
  • Walk Score: 32

9. Centereach, NY

  • Number of Airbnb Listings: 9
  • Monthly Airbnb Rental Income: $7,059
  • Airbnb Cash on Cash Return: 8.84%
  • Airbnb Cap Rate: 8.99%
  • Airbnb Daily Rate: $139
  • Airbnb Occupancy Rate: 64%
  • Number of Listings for Sale: 15
  • Median Property Price: $548,640
  • Walk Score: 59

10. Kingsburg, CA

  • Number of Airbnb Listings: 8
  • Monthly Airbnb Rental Income: $9,443
  • Airbnb Cash on Cash Return: 8.88%
  • Airbnb Cap Rate: 8.98%
  • Airbnb Daily Rate: $165
  • Airbnb Occupancy Rate: 62%
  • Number of Listings for Sale: 10
  • Median Property Price: $760,939
  • Walk Score: 87

Conclusion

Now you have the knowledge and the understanding of the best rental markets and highest cap rate real estate markets in the US in 2022. All that’s left for you is to go through the available properties and consider them for your investment portfolio. Of course, if you sign up for Mashvisor, you can easily turn 3 months worth of real estate research into an efficient 15-minute analysis.




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