Bustin' Caps

People, yawnnnnnnnn.

There's nothing in the real estate news to get me mad. Nothing to argue about. Nothing to confess. When has "nothing" ever been good? No news is good news, except for people reporting the news (How dare he call himself a reporter).

So, just a quick lesson on the Cap Rate (Capitalization Rate) and what it means to your real estate investment.

The Cap Rate is the ratio between the yearly net operating income produced by an asset and its capital cost.

Let's say you buy a duplex at $300,000 and it produces $2600 worth of rent (Very doable now here in San Diego. There are even better deals than that). Let's calculate the Cap Rate.

$2600 times 12 months comes to $31,200. That's your gross income. Now you have to take out your expenses NOT including your mortgage (Not considered an expense. I do not make the rules).

Expenses will typically be: Property taxes (Your income taxes are your problem), vacancies & maintenance (Maintenance can cover a very broad spectrum. We will keep it simple).

Property taxes on our deal will be approx $3000. The vacancy rate in San Diego is approx 5% (One of the best in the country) which comes to $1,560 from our $31,200 gross, & maintenance is a variable type # (Anything can happen. Also, the dollar amount will change drastically if you do it yourself or pimp it out). What I like to do is take the taxes plus the vacancy and have that be my maintenance amount, $4,560.

So, our expenses come to $9,120. Subtract that from our net and we have a projected net of $22,080. Note: This is a projection. You must do your due diligence and inspect the property you buy thoroughly so you know what you have.

Now, take that $22,080 and divide it by the purchase price of $300,000. That comes to a Cap Rate of 7.36%. Pretty darn good. This doesn't even count for appreciation, which will come eventually, or tax incentives.

People, this is not the only tool to use when buying investment property. Your loan is important (Most important?). The area is important (What's that saying about location?). Your spouse's opinion (Brother, I promise this is important). Tons of other things too. But the Cap Rate is a good starting point.

Let me know if you have any questions re any real estate junk, 619-507-7449.

God Bless.