The single family rental market is booming as homeownership trends continue to drop and average monthly rents increase. Many investors are capitalizing on these optimal investing conditions and one of the easiest ways to measure a property’s profitability is through cap rates.
How to Calculate Cap Rates
Cap rates are defined as the relationship between the investment property’s net operating income (rents minus expenses) and the overall market value of the property. For example, let’s say your investment property is valued at $100,000 and collects a monthly rent of $1,000, which totals $12,000 per year. If the annual expenses on the property are $4,000, subtracting that value from the $12,000 generated through rent yields $8,000 in net income. $8,000 is 8% of the $100,000 value of the property, thus the cap rate on this example would be 8%.
Identifying High-Cap Rate Markets
While there are profitable markets throughout the country, knowing where to invest is key to achieving the profits you are looking for on your investment properties. HomeUnion’s research services team used data from 2015 to conduct an in-depth study on real estate markets across the U.S., and ranked some of the best cities according to their cap rates.
Investing in markets with higher cap rates makes for a wise investment choice as it can create a higher return on your investment. If you are considering several different types of real estate investments or locations, you can use cap rates as a means to help you make an educated and informed decision.
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