There are many tools available to help investors make sound financial decisions regarding property selection. The most common of these tools is the cap rate. Use this guide from a real estate attorney Las Vegas offers to understand cap rates for yourself.
Why the Cap Rate?
For most investors, re-selling a property for profit is generally the end goal. However, in the meantime, you want to make sure you are getting the most amount of money out of the property each year. The cap rate helps you make a decision based on that goal.
The cap rate is the annual return you can expect on an investment. This is important because it gives you a solid foundation from which to base your investment options. The cap rate helps you to be sure that your property related expenses will be covered, while also generating income.
Calculate the Cap Rate
You can easily calculate the cap rate of a property with four steps:
- Determine how much you can expect from the property in rent each year. If the property isn’t already rented, shop around for rents being paid for comparable properties.
- Estimate your annual expenses for the property. This is done by adding up taxes, vacancy costs, utilities that will be paid by you, insurances, repair costs and any other expenses.
- Calculate your annual net income. This is done by subtracting your annual expenses from your annual expected rent.
- Calculate the cap rate. This is done by dividing your annual net income by the cost of the property. This will give you a percentage that may vary depending on how much you actually end up paying for the property in question.
If you finish your calculations and your numbers seem off or of concern, you can contact a real estate lawyer Las Vegas trusts to help you obtain more accurate numbers.
Understand the Cap Rate
Your goal is to find properties that have a higher cap rate. Higher cap rates indicate a higher annual return on your investment. As a general rule, cap rates that are in the range of between 4 and 10 percent indicate solid investments.
Regardless of the cap rate, you always want to make sure that you have enough money to manage a property. This means that, after the mortgage has been paid, you are not strapped for cash, even if the property stands vacant. If this is the case, you are signing up for an investment that is likely going to be more trouble than it is worth.
Even with these DIY calculations, there is still a chance you will choose an investment that is not in your best interest. Avoid this by discussing your plans and interests with a trustworthy real estate attorney Las Vegas can rely on at Marc Simon Law. For more information about this real estate attorney Las Vegas trusts, contact 702.451.7077 or firstname.lastname@example.org.