What is a Good CAP Rate? What Makes a Good Return on Investment?

In my last article, I discussed how to calculate the three most common ratios used to determine the rate of return on real estate investments: Capitalization (CAP) Rate, Return on Investment (ROI), and Equity Return Rate. Of these, the most commonly used is CAP rate. However, it is actually the ROI that provides you with the most accurate picture of whether or not a particular income property will make a good investment.

Because it is so popular, we will discuss CAP rate first. A 10% CAP rate is often referenced as a goal to shoot for. In general, most areas of the country will have CAP rates that max out at 8-12%. Because Las Vegas has led the nation in foreclosures for the past three years and counting, home prices have plummeted to as low as 30% of their former highs. Rents, however, have only declined moderately. As a result, Las Vegas is currently offering the highest CAP rates available in the United States. For the last three years, I have specialized in purchasing Las Vegas income properties dirt cheap at the foreclosure auctions, renovating them to move-in condition, placing renters or lease option tenants in them and selling them to my investor clients as turn-key investment opportunities with CAP rates that average 10-20%. If you are interested in this type of investment opportunity, please contact me for more information.

Moving on, the better way to evaluate potential investment properties is by calculating Return on Investment or ROI. (If you aren’t sure what this is or how to calculate it, see my previous article on the topic.) ROI portrays what your return is on the money that you have actually put into the project. This provides us with an interesting comparison. If you purchase a property for cash and that property provides you with a 15% CAP rate, then your ROI will also be 15%. However, if you purchase that same property using some form of financing, then your ROI will be much, much higher. As long as you are purchasing properties that have positive cash flow, after all mortgage notes and other expenses are paid, it is always better to purchase using financing in order to maximize your rate of return. We are currently offering our investor clients Las Vegas rental properties that are providing annual ROIs with 25% down of between 20-40%.

The important thing to remember when shopping for investment properties in Las Vegas, or anywhere, is that good deals will always stand up to scrutiny. You should always ask for a detailed proforma or create your own for any investment property that you are considering purchasing. This will insure that you find the best investment properties for your investment dollars.

If you are interested in learning more about investing in the Las Vegas real estate market please contact me for more information.

Glenn Plantone
Wynn Realty
(702) 656-3264
gsplantone@gmail.com

www.glennplantone.com

If you’d like to see more of Glenn’s articles, follow his blog at:
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How to Calculate Real Estate Capitalization Rates (CAP Rates)

If you are looking to purchase investment property, you are going to see the term CAP rate, or real estate capitalization rate, used quite frequently. Fortunately, CAP rate is easy to calculate and easy to understand.

The first step to calculating CAP rate, or capitalization rate, for investment real estate, is to determine the sales price. If you have already purchased the property, then you would simply use the total price you paid for the home including closing costs, etc. If you have not yet purchased the investment property,then use the asking price plus the amount you plan to pay for closing costs, etc.

The second step to figuring the CAP rate for an investment property, is to determine the yearly Net Operating Income (or NOI) for the property. In order to do this, take the monthly rent that you plan to receive for the property and multiply by 12 months. Then take the monthly operating expenses for the property and multiply by 12 months. Subtract the operating expenses from the rent total to obtain the Net Operating Income or NOI. (Remember, when calculating expenses, you need to total all expenses associated with renting the property, including maintenance, HOA fees, reserve fund, management fees, property taxes, homeowners insurance, etc.)

As an example: If you expect to receive $1500/month in rent, your total yearly rent will be $1500 x 12 = $18,000. If your monthly operating expenses are $300/month, then your yearly expenses will total $300 x 12 = $3,600. Subtract the expenses from the rent for a yearly Net Operating Income (NOI) of $18,000 - $3,600 = $14,400. The final step in calculating CAP or capitalization rate for a property is simply to divide the Net Operating Income (NOI) by the sales price. As an example: If you have a yearly Net Operating Income (NOI) of $14,400, and you purchased the property for $150,000, then you have a CAP rate of $14,400/$150,000 = .096 or just over 9% CAP Rate.

In my next article, I will discuss how to determine a target CAP rate for your investment properties.

If you would like more information on the Las Vegas rental real estate market or investing in Las Vegas properties, please contact me.

Glenn Plantone
702-769-9872
teamplantone@gmail.com