1121 - How To Calculate Cap Rate For Investment Properties by Paul Moore part 2
Nov 9, 2023
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Real estate investor Paul Moore explains how to calculate cap rate for investment properties. Topics include various methods of analyzing properties, using cap rate as an analysis tool, and understanding the significance and factors influencing cap rates in real estate investment.
The price per unit method fails to consider important elements like revenue, expenses, maintenance, and neighborhood factors, making it an incomplete evaluation of property value.
The Gross Rent Multiplier method, although dividing the property price by the annual gross rent, disregards expenses, maintenance, and market factors, resulting in an inaccurate determination of property value.
Deep dives
Methods of Analyzing Properties: Price per unit
The price per unit method, although popular for its simplicity, fails to consider important elements like revenue, expenses, maintenance, and neighborhood factors. Just comparing the cost per unit does not provide a complete evaluation of the property's value.
Methods of Analyzing Properties: Gross Rent Multiplier
The Gross Rent Multiplier (G.R.M) method divides the property price by the annual gross rent, but it disregards expenses, maintenance, and market factors. Using this method may not accurately determine the true value of the property.
Methods of Analyzing Properties: 1% Rule
The 1% rule suggests that the rent should be at least 1% of the cost per unit. While this rule can provide a rough estimate, it neglects operating expenses, maintenance, capital expenses, and debt terms. It may only be used as an initial gauge.
If you’re new to real estate investing, you may feel overwhelmed and wonder how to determine which properties to buy. Optimally, you’d like to get a handle on which investments will be the most profitable before jumping in—and you can—by understanding how to calculate cap rate.
Calculating the market cap rate, or capitalization rate, is hands down the best place to begin, especially for real estate investors.