Real estate evaluated with Cap Rate Ratios. Salt Lake City, UT
Since our method guarantees such a vast difference in cash flow from what is typically received from a single family and multi-family investment property we wanted to illustrate what investors in apartment houses do when they asses a deal. They evaluate the profit potential of the property as opposed to what similar properties recently sold for, to establish value. Basically, how that investment is going to pay them back, similar to annual interest rate paid on an investment in a CD or Bond. So the ratio between the sum invested and the net income the asset produces is the cap rate.
By applying a certain criteria, someone investing in larger money producer, such as apartment units can determine a worthwhile investment and the same criteria can be used when looking at our system applied to your single family and smaller multi-family rentals. A first class deal for an investor in apartments is a cap rate of 10% or better.
annual net cash flow / total dollars invested in the property = Cap Rate
For illustration, if a single family residence (SFR) were purchased for $85,000 and it required $15,000 in remodel costs so the total investment would be $100,000. Market rents for the area suggested that you could lease the property for $1,250 a month gross or $15,000 annually. Subtract your total annual operating costs; principle, interest, taxes, insurance, property management/maintenance costs, (lets use $1,050 a month) to arrive at your net positive income. So annualized operating costs would then be $12,600 annually, which leaves $2,400 in net annual cash flow.
$2,400 / $100,000 = 2.4% cap rate
It’s not abnormal for a usual rental to cash flow $200 a month net. Logically, the property owner is relying on the property’s eventual market appreciation, and tax advantages, to evaluate their overall investment also.
Now apply our system, and rent the dwelling at double market rates of $2,500. Our recommended method does necessitate some additional operating expenses, so the monthly effective operating costs would now be $1,250 a month, as a result providing $1,250 a month in net cash flow or $15,000 annually.
$15,000 / $100,000 = 15% cap rate
Now that’s much better and the envy of every apartment owner out there and you did it with a SFR. It’s not wholly passive income, it does require some additional time, but not as much as one might think. We teach ways to reduce management time considerably.
To learn how to maximize your “Cap Rate,” download our free Ebook, Max Cash Flow Now, from the side bar at our main blog site.