, 10 tweets, 2 min read Read on Twitter
Income property buyers use different short hand quick formulas when pre-screening a deal. One of the most common is Cap Rate (Capitalization Rate)
Cap Rate =
Net Operating Income/
The current value of asset
For real estate acquisitions this means your total cost of acquisition plus rehab/repair expenses (if applicable)
The definition of a "good" Cap Rate will vary by
* personal goals and income tax strategies
* the condition, location &/or potential added value
* &/or appreciated value of an income property.
I posted this high cash flow/ high cap rate deal yesterday.
Let's run a quick "napkin numbers" analysis.
Net Operating Income/
Total asset value
650 × 12 = 7800
I like to take 30 percent off to calculate a conservative net( for closing costs, management, taxes,insurance & maintenance)
7800x.70 = $5460

Next...
Let's choose a value. Sure you are paying $14000 but if the tenant moves out and you have to turn a 'seasoned' home and it is vacant for 8 to 12 weeks, that costs money. Let's use the worst case number first. I'll add 8k: $22000
5460/22000 = 24.8% Cap Rate
Still crazy high. Anything in double digits is highly attractive. Now...
Let's take best case scenario. You spend $2000 or so on maintenance and a few extras and retain the paying tenant. After closing fees you are at $16500 total expense

5460/16500 = 33% Cap Rate
Crazy high.
Note: These deals are at risk for higher turnover etc and that's a whole other thread. But the high cap rates are shiny objects: we will cover the nuts and bolts at another time.
PS that "napkin" calculation would look something like this. The expenses here are 31% of the gross income.
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