When you make the decision to invest your money, it is only natural to feel some level of concern or insecurity that you could be making the wrong decision. It is that same anxiety that causes some people to even steer clear of the stock market. Lucky for you, when you purchase Seattle real estate as an investment there are methods to help take the guess work out of whether an investment property represents a good value or not. One of those indicators is a cap rate.
What Are Capitalization Rates?
Cap rates are the most commonly used method of selecting properties among successful and seasoned real estate investors. It refers to an estimate of what your potential return on investment (ROI) will be.
There are several different formulas that investors can use to calculate cap rates. The most popular method requires you to divide the property’s net operating income (NOI) by its current market value.
In other words, you take the amount of net profit (revenue minus expenses) that you expect the property to generate annually and divide it by the current market value to determine what the cap rate is.
In another, less popular formula, you calculate your cap rate by taking that same net operating income and dividing it by the property’s original purchase price instead.
This formula is considered to be less reliable, because there are too many factors at play which can manipulate the cap rate to inflate or deflate a property’s perceived value. For example, if the property was purchased 30 years ago when property values were dramatically lower, it is going to mislead you into believing the cap rate is better than what it is based on today’s property values.
How Do Capitalization Rates Impact You As A Seattle Real Estate Investor?
Obviously, as a successful real estate investor, your goal is to identify the most desirable properties available and secure them at the right price and terms. Not only will calculating a potential property’s cap rate help you assess its potential investment value, but it will also help you choose between different Seattle properties that you may be considering and how long it will take to recover your investment. For example, if you find a Seattle property with a 5% cap rate, you know you’re looking at about a five-year window before you’ve recovered your initial investment.
Ready To Start Investing In Seattle Real Estate?
Are cap rates useful in finding a profitable real estate investment in Seattle? Absolutely!
Should you use them as the sole indicator of whether or not you should pull the trigger on a particular property? Absolutely, not!
There are many other factors like future cash flow, account leverage, property improvements, potential for equity growth and a litany of others. Both seasoned and first-time investors will increase their chances of success by seeking the advice and guidance of a knowledgeable local real estate broker. Our expertise is invaluable in identifying and recommending the most desirable properties and areas targeted for growth. It would be my pleasure to help you attain your real estate investment goals and financial success!