Knowing A Good Cap Rate When You See One

Dated: 06/25/2018

Views: 36

In today's real estate market buying a sound income property can be a bit tricky especially if you do not understand the local real estate market. What are the rents, is there a demand for the property to lease, how much rent, and how long does an average tenant stay. It is important to understand your tenant base before you purchase a property. 

This article comes from by Grant Cardone and he makes some excellent points on what a good income property is.
"As a real estate investor that many people look to for advice, the number one question I get asked is, “What CAP rate do you buy?” but this is the wrong question. One piece of data doesn’t substantiate a deal. CAP rate is important but don’t get locked into focusing just on one term. All the pieces of data matter."
A lot of investors get locked in on the price of the home and the ROI of it also. These are important factors to consider, but when I purchase real estate for income I also look at the quality of an area. For example the schools, shopping, everyday things I may need should be close by. 

Getting a Realtor who knows the business and assist you in securing that tenant is crucial to your success. For example a lot of wholesale homes are sold as is and that means when the property is sold you have to deal with the repairs. How is that going to effect the overall price of the property? 

"Usually different CAP rates represent different levels of risk. Low CAP rates imply lower risk, higher CAP rates imply higher risk. The question is, what is the right CAP given the riskiness of the deal?"
Cap rates need to be verified and checked. Look at the area the property is in and see if there is a lot of listings. If there are that might be an area you do not want to be in. Areas with fewer listings usually a sign that people want to stay.  

"Is the property in Manhattan or rural West Virginia? A larger, wealthier,and better-educated population will drive a local economy more, this is why CAP rates are lower in a place like LA than in Memphis. This is why even within large metropolitan areas CAP rates can be significantly different from each other, with properties near downtown usually having lower CAP rates (and risk) than properties in the suburbs. But again, there are no strict rules to follow, every location has its perceived risk."
I always look at the vehicles that are in the driveways and the overall condition of homes in that area. Remember income can only happen if you get paid, some areas just have some issues that keep from getting paid a consistent rent and that means loss of income. 

Looked at a duplex for an investor that was advertised as a higher rents and they where not correct. The duplex was mis stated $475 a month in rent that's $5700 a year if you could keep a tenant in it. Having the correct information on a property is very important before you buy it.

A property needs to be in an excellent area to get the best equity growth also. I am currently selling a lot of homes for investors that purchased in very high CAP rate areas that are losing money on the sell. They also have less than desirable tenants. 

We are buying very quality homes that are attracting tenants that want nice homes. They pay top dollar for that home also. We just rented a home over the weekend for $1200 a month. We had over 50 showings and decided on a tenant that is a professional. 

Need a Good CAP Rate Real Estate? Look at all the different parts of a transaction and understand that you need to be in an area that people want to live in and not one they have too. 

Need good Real Estate? I'm Brett call 216-703-5740 EXP Realty Ohio and 602-363-6551 EXP Realty Arizona

Get more information on our Income Real Estate Program
Blog author image

Brett Young

With over 17 years in the real estate industry, Brett’s primary focus has been on the improvement of housing in neighborhoods . He cooperates well with other brokers and agents that have clients in ....

Latest Blog Posts

The Do’s and Don’ts During the Home Buying Process

DON’T open any new bank accounts. Keep all your banking the same.DON’T open any new credit cards. Pay everything off every month. Don't buy more than you can afford (that's also good

Read More

5 Quick Tips for Pricing Your Home for Sale in the Greater Cleveland Area

When you put your home up for sale in Northeast Ohio, one of the best ways to determine the asking price is to look at recent home sales. There’s rarely a perfect apples-to

Read More

House-price gains accelerate in Cleveland

This report comes from "That doesn't mean every house in Northeast Ohio has regained the value lost during the housing bust, of course. Local data show that

Read More

Northeast Ohio Fall Maintenance Checklist

It's that time of year in Northeast Ohio when pots of soup hit the stove, favorite sweaters come out of summer hiding, holiday gatherings are just around the corner, we tend to roost instead of

Read More