Terms and Information About Buying Investment Property

 

Cap Rate - Capitalization rate is the ratio between the net operating income produced by the price paid to buy the property.

 

\mbox{Capitalization Rate} = \frac{\mbox{annual net operating income}}{\mbox{cost (or value)}}

Example:   Net Operating Income $15,000  / Sales Price $150,000  =  10% Cap Rate

 

 

Gross Income

Total monthly rents for the year

Example:   Duplex rents are $800 on one side and $850 on the other side

Total Year Gross is $19,800

 

Expenses Property Tax, Property Insurance, Landscaping, Property Management, repairs/replacements

Utilities can  include electric, gas, water/sewer, trash pickup.   The owner may pay water/sewer/trash pickup and the

tenant may pay the electric.   There are properties where the tenant pays all expenses.   It varies from property to property.

 

Mortgage is dependent on how much is put down and the interest rate

Usually 25% down is required by most lenders for investment properties.

 

Example of a Duplex

Monthly gross                                                  $1650

Expense Property Management                         -165

Landscaping                                                        -100

Mortgage (including taxes and insurance)       -1070

-----------------------------------------------------------

Cash Monthly return                                       $   314

 

 

Cap Rate Gross - Expenses = ( Net Income / Divided by Sales Price of Property)

Example: Gross $19,800 - Expenses = Net Income $12,220 / divided by $160,000 = 7.6 % Cap Rate

 

The higher the cap rate the better the cash flow

Target cap rate is above 9% cap rate

 

Return on investment is

Net Income / divided by cash put into investment

Example: Net Income $12,220 divided by the cash invested $40,000 = 30% return on investment

 

 

 

 

 

Use caution when buying.  Make sure you have seen the property and have a home inspection.