what is a good cap rate for an investment property
Before we get into the discussion of what makes a good rate, let's first review how this metric is calculated!
Investors need to know what a good caprate in real estate is. To go further, what is the best cap rate for multifamily properties in real estate? These are five facts you should know about the cap rates so that you can decide if your potential investment is worthwhile.
There are many regional variations but generally speaking, assets with lower capitalization rates like 4-5% would be classified as a class A or B asset.
Before we get into the discussion of what makes a good rate, let's first review how this metric is calculated!
The deal's capitalization rate is a key component. Multifamily real estate syndicators will argue that the capitalization ratio is as important and important as net operating income, or even the purchase price. In fact, it's how you calculate it! This metric determines the value of a property and ultimately whether you should invest in it.
There are regional variations in cap rates. For a property in NYC, a cap rate of 6% is different than for one in rural areas. A good rule of thumb for real estate investors is that cap rate compression occurs in higher-populated cities. They also have lower average capitalization rates.
This metric is fairly easy to calculate. To calculate the cap rate, divide the asset's net operational income (NOI), by its purchase price.
The location of the property and the return required to make it worthwhile will determine the "cap rate" at which you should purchase. You will need to assess your risk tolerance. Professionals buying commercial properties might choose to buy in high-demand, less risky areas at a 4% rate, while they would prefer a 10% cap rate in low-demand, more profitable areas. A reasonable range for earning investment property income is between 4% and 10% per annum.
