What is a Property’s Cap Rate in Real Estate?
A Property’s Cap Rate also known as Capitalization rate indicates the Rate of Return that is expected to be generated on an investment property.
Generally, 4% to 10% per year is a reasonable range to earn for your investment property, depending on the area.
An Investor may invest in a property at a 4% cap rate in high-demand (and therefore less risky) areas,
but may not invest in a property at 8% (or even higher) cap rate in low-demand areas.
So now, we want to find out How to Calculate a Cap Rate for a duplex property that is listed on the market for $700,000
First, we need to find out the Net Operating Income.
We take the Total Income (rent collected) minus expenses (property taxes, Insurance, maintenance= Net Operating Income.
For this duplex,
There are two 2 tenants paying $2000 each, total of $4000 per month
$4000x12 months = $48,000 a year income
For Expenses - we will keep it simple with just property taxes and insurance -
Property taxes $10,000 per year
Insurance = $2,000 per year
Total expenses $12,000 per year
$48,000 - $12,000 = $36,000
$36,000 / listing price $700,000 = 5.1% is the cap rate.
If you want Cap Rate to be 6% for this property then the offer price for this property should be $600,000
$36,000/.06 = $600,000
As you can see as the cap rate increase, the price decreases.
As a realtor, you would want to advise your client to go with at least 5-6% cap rate on any investment property.
If you want have questions, feel free to contact us at 516-218-1261
Lucky Lakhwinder Singh
CEO, Co-Owner Licensed Real Estate Broker
LJ Realty Team
127-03 Rockaway Blvd
South Ozone Park, NY 11420
Call or Text 516-218-1261
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