If you are an investor who is looking to engage in rental properties, you should use every available tool to ensure you are buying real estate assets that will generate the highest return on investment (ROI) once you own them. One of these tools is the cap rate calculator.
This type of calculator helps to quickly and easily determine the capitalization rate (cap rate) of a rental property, which is one key factor in determining how much income you make from your investment. In a way, it gives you an idea of the first-year ROI that you can expect, helping you decide on whether or not to buy a certain property.
Why Use a Cap Rate ROI Calculator When Buying Rental Properties
Calculating the cap rate of a certain rental property can be a headache, especially if you’re not good with numbers.
This is where a cap rate ROI calculator comes in handy because it does all of the work for you. With it, all you need to do is input some simple information about the property, and it will give you an estimated cap rate.
This ease of use makes this calculator a valuable tool for any real estate investor because it can help you make quick and informed decisions about which properties are worth your time and money.
Using a Cap Rate Calculator: Understanding the Basic Elements
Now that you have an idea of what a cap rate calculator is, it’s time to take a closer look at how it works. Initially, you should first understand the metrics that this tool uses to yield the numbers.
Purchase Price of the Property
This is the price you paid, or plan to pay, for the property. Or, it is its current fair market value.
Gross Potential Income
This is the total amount of money that the property could bring in if it were 100% occupied.
Vacancy Rate
The vacancy rate is used to account for any lost income due to units being vacant. It’s calculated by taking the number of vacancies and dividing it by the total number of units in the property. For example, if a property has 50 units and five of them are vacant, the vacancy rate would be 10%.
Operating Expenses
Operating expenses are all of the costs associated with running the property on a monthly basis. These can include things, like insurance, taxes, repairs, and utilities.
Net Operating Income
This is your gross potential income minus your vacancy rate and operating expenses. This is the amount of money that you can expect to bring in on a monthly basis after everything is said and done.
Once you have all this information, you can plug it into the calculator, and it will give you an estimated cap rate for that particular property. It’s important to remember that this is just an estimate, but it’s a good starting point when assessing potential properties.
How to Use a Cap Rate Calculator
The first thing that you should do is to find a reliable cap rate formula calculator, such as the one you will find here, https://theshorttermshop.com/cash-flow-calculator/.
Once you are in, you will need to input some basic information about the property in question. This includes the purchase price, the gross potential income, the vacancy rate, and the operating expenses.
After you have input all of this information, the calculator will give you an estimated cap rate for that property using this general formula: Cap Rate = Net Operating Income / Purchase Price.
Now, let’s put this process into one example.
You are buying a property with the following details:
- Purchase price – $100,000
- Gross potential income – $12,000
- Vacancy rate – 0%
- Operating expenses – $600 per month
Plugging all of this information into the investment property cap rate calculator, you get a cap rate of 11.4%. This is a good number for a rental property to purchase.
It’s important to remember though that the cap rate is just one metric to consider when assessing a rental property. It’s not the be-all and end-all, but it’s a good starting point. There are other things to consider, such as location, cash flow, and potential appreciation. But if you’re looking for a quick way to assess a property’s ROI potential, using a cap rate calculator is the way to go.
What Is a Reverse Cap Rate Calculator
While there is the cap rate calculator, there is also the reverse cap rate calculator. So, what does this tool do?
It’s basically the same thing as a cap rate calculator, but it works in reverse. Instead of inputting the purchase price and getting an estimated cap rate, you input the cap rate that you want, and it tells you what the purchase price should be.
This tool can be helpful if you’re looking at a property, and you have a cap rate in mind that you want to hit. You can use it to see if the asking price is in line with what you’re hoping to pay. If not, then it might be time to move on to another property. But if it is, then congratulations! You’ve found yourself a potential winner.
What Is the Ideal Cap Rate for Rental Properties
When investing in rental properties, there is no such thing as an ideal cap rate. It all depends on your goals and the location.
Some people are happy with a lower cap rate if it means that they’re getting a property in a good location with potential for appreciation. Meanwhile, others are only interested in properties that have a high cap rate, regardless of location. It really all comes down to what you’re looking for in an investment.
But if you’re just starting out, aim for a cap rate of around 10%. This will give you a good return on your investment while also providing some buffer room in case things don’t go exactly as planned.
Where to Buy Rental Properties with the Highest Cap Rates in the US
So, you already know how an investment property cap rate calculator works and what the ideal cap rate is for rentals. Now, you can proceed to finding and buying properties.
Here are five of the best cities in the US with the highest cap rates that you should look into.
1. Detroit, Michigan
With an astonishing cap rate that ranges from around 4% to around 9%, Detroit is definitely a city worth considering for your rental property investment.
The high cap rate is due to the low prices of properties in the area. In fact, you can find a decent house here for around $50,000. And, with the average rent being $850, you’re looking at a pretty healthy ROI.
Just be sure to do your due diligence before buying any property in Detroit. The market is still volatile, and there are some areas that you should avoid. But if you find a good deal on a property in a good location, then go for it!
2. Los Angeles, California
This city is also a good place to buy rental properties. The cap rates are around the same as Detroit’s, but the prices of properties are a bit higher.
The average price of a house in Los Angeles is $350,000. But don’t let that scare you off. There are still plenty of deals to be found if you know where to look. And, with the average rent being $2,200, you can definitely make good returns.
3. Jackson, Mississippi
If you’re looking for Southern charm and high cap rates, then Jackson is the place for you. Rental properties are highly in demand in this city due in part to the growing population and booming economy.
Just be sure to do your homework before investing in Jackson. The market is starting to heat up, so prices are on the rise. Also, the crime rate is higher than the national average. So, again, due diligence is key when buying any property here.
4. Columbia, South Carolina
This city has a lot to offer investors. Aside from the high cap rates, another good thing about investing in rental properties in this city is that there is no state income tax. So, that’s one less thing to worry about.
5. Austin, Texas
Last but not least, we have Austin. This city is a great place to invest in rental properties for several reasons.
On top of the considerable cap rates, the average rent here is $1,600, so you can definitely make a good return on your investment. Also, Austin is a rapidly growing city. So, if you buy a property here now, not only that your property will appreciate in value over time but there is less possibility that it will go vacant for long periods of time.
These are just five cities where you can find rental properties with good cap rates. There are still other places to explore, so feel free to do your own research. Just ensure to find a reliable cap rate calculator real estate investors use to calculate the numbers, so you will have a good footing in making a wise decision for your investment.
Conclusion
Becoming a rental property investor is definitely a wise move if you want to build wealth from real estate and achieve financial freedom. And, using a cap rate calculator is the best way to find properties with the highest ROI.
We hope you found this article helpful. If you have any questions, feel free to leave a comment below, and we’ll get back to you as soon as possible.
Happy investing!