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Real Estate Deal Metrics:
As an investor, how do I calculate the capitalization rate?
//Thread with numbers and calculations//
As an investor, how do I calculate the capitalization rate?
//Thread with numbers and calculations//
Let's say we own 10 units and they rent for $1,000/month each.
Every year, we generate $120,000 in income (gross rents possible).
Every year, we generate $120,000 in income (gross rents possible).
We assume that we need to account for vacancy which is at 5%.
$120,000 in income * 5% = $6,000
This $6,000 is subtracted and put into a bank account for any future vacant units (reserve account).
For the year, our effective gross income is $120,000 - $6,000
$112,000
$120,000 in income * 5% = $6,000
This $6,000 is subtracted and put into a bank account for any future vacant units (reserve account).
For the year, our effective gross income is $120,000 - $6,000
$112,000
Let's assume in total it costs $65,000 per year to operate.
This will include repairs & maintenance, utilities, insurance, property tax, property management, and capex reserves.
Net operating income is our total income generated after accounting for vacancy - operating expenses
This will include repairs & maintenance, utilities, insurance, property tax, property management, and capex reserves.
Net operating income is our total income generated after accounting for vacancy - operating expenses
$112,000 - $65,000 = $47,000 in net operating income.
For this building, I have paid $800,000.
What is my capitalization rate?
For this building, I have paid $800,000.
What is my capitalization rate?
Cap rate = net operating income / market value (or price paid)
= $47,000 / $800,000 = 5.9%
This is the return I can expect if I paid all cash for the deal.
A capitalization rate is another way of saying "unlevered return" since no debt is used to acquire this asset.
= $47,000 / $800,000 = 5.9%
This is the return I can expect if I paid all cash for the deal.
A capitalization rate is another way of saying "unlevered return" since no debt is used to acquire this asset.
