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:
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,
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:
Your annual operating expenses will be $5,800. $3,800 is for property taxes. $2,000 is for maintenance.
Net operating income = Your gross rental income less your operating expenses, such as payroll or repairs. The following steps will help you determine this number:
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.