If you are evaluating a property that will generate predictable, regular income, the cap rates is an important metric. The cap rate for a 4-unit apartment complex occupied by year-long tenants would be calculated,
Also, the cap rates are calculated assuming that you pay cash for a property and not take out a mortgage. The cap rate does not include interest or points paid. It does not include any other costs associated with the acquisition of the property such as closing costs and broker's fees.
Many real estate investors include an estimated loss of rent of 5-10% in their calculations. If you assume 90% occupancy, the following example would be:
Compare the cap rates of similar properties that you are considering investing in. If you are weighing the pros of two duplexes in the same area, you can compare their cap rates to help you choose which property would be the best addition to your portfolio.
Above, the cap rate calculation assumes you are receiving full rent each monthly. In other words, the property is 100% used 365 days a year and your tenants pay the rent. A single-family home might experience 100% occupancy on a regular basis, but it is less likely in multi-unit buildings that have more turnover. In order to calculate your cap rate, make sure you account for less than 100% occupancy. Here's how:
The cap rate of a property can't be calculated if it's being rented out, flipped, or offered as a vacation home. The cap rate's 12-month time frame is less important when flipping a property. Short-term vacation rentals and short-term rentals will see swings in income, occupancy, as well as operating expenses that fluctuate because of seasonal maintenance or repairs due to high tenant turnover. These factors all affect your net operational income, which results in an unpredictable cap rate calculation.
You can also determine the cap rate for potential investments to help you decide if the asking prices are reasonable. If the cap rate calculation is incorrect, you might be in a position to negotiate a lower price.