Net operating Income: Your gross rental revenue (the amount you get from rent) less operating expenses (such payroll and repair costs. Here's how to calculate it:
The cap rate calculation below assumes that you are receiving 100% rent each month. That is, that the property has been occupied 100% for at least 365 days per year. Your tenants must also keep up with rent. It's possible for 100% occupancy to occur in a single-family residence, but not for multi-unit buildings with greater turnover. You should consider a cap rate that is less than 100% when possible. Here's how:
There are many methods to calculate the caprate. We'll only focus on the most commonly used. The base formula is:
Real estate investors usually include an estimate of rent loss between 5-10% in their calculations. Let's say you assumed 90% occupancy as in the previous example.
Expect annual operating costs to be $5.800 with $3.800 in property tax and $2,000 in maintenance.
It is important to have a solid grasp of financial concepts in order to make intelligent residential real-estate investments. It's not uncommon to feel overwhelmed by the many financial metrics, formulas and advice for evaluating potential properties. There is no universal formula you can use to determine if an investment is right. By learning how to use valuation tools correctly, you will be able to determine which methods work best for each prospect.
Capitalization rate, also known as the "cap rate", is one of many indicators that a property's investment ability. Cap Rate is a measure of your potential annual rate for return, or the loss or gain you might see from your investment.