For rental property investors, buying at the right price is critical. If you can buy with a “cap rate” of 8 or more, you may have a good investment.
To real estate professionals, the capitalization (“cap”) rate is the return a property would provide to a hypothetical all-cash buyer. For example, if a house can be bought for $150,000 in cash and rented out so that the landlord receives $12,000 (8 percent) per year, after operating expenses, it has a cap rate of 8. A cap rate of 9 or 10 would be even better.
All-cash purchases of rental properties are rare but leverage can be a positive factor, in these days of low interest rates. Borrowing at, say, 7 percent to buy a property yielding 8 percent is a winning formula.
To figure out a cap rate, you must be able to estimate how much rent you’ll be able to charge. You can search online to get that information; a local landlords’ association also can be good source for learning about rents. For the sake of prudence, you might project receiving 90 percent of current rental rates because some vacancies should be assumed.
