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Cap Rate: What is it, and Why is it Essential for Your Real Estate Investment Property?

Earning a return on investment is the reason for becoming a real estate investor. But, before you commit to your investment, you want to know what that return will look like. The capitalization rate, or cap rate for short, is the most commonly used baseline to determine what you can expect to return on your investment. A cap rate can also give you insight into comparing investment properties to understand the best investment. 

While cap rate is a fundamental tool for commercial real estate investing, it can be used incorrectly without fully understanding it. IPRG, as your trusted real estate investment brokerage and advisory firm, will help you calculate your cap rate and sell your property with the best return on your investment.

Calculating Cap Rate

The calculation for cap rate is a simple formula of dividing the net operating income by your property asset value. To figure out your net operating income or NOI, you would subtract your property operating expenses from the total rental income collected on your property. Operating expenses can include utility costs, maintenance, insurance, taxes, and other operating costs but do not include mortgage or interest payments, depreciation, capital expenses or exchanges. 

Determining a reasonable cap rate depends on your investment strategy. For example, if you’re selling your investment property, you would want a lower cap rate, so the value of your property would be higher. With a higher value property, you could make a higher return on your investment. However, if you’re looking to invest in another property, you would want a higher cap rate to get a higher yield on your investment. Either way, it is essential to calculate your cap rate with your broker to ensure a correct calculation.

Importance of Capitalization Rate

Once you’ve determined the market cap rate with the advisory from your IPRG broker, you can determine what you can expect to make when you hold the property or when  you plan to sell. It will help your broker know the best price to list your property. The cap rate can also help your broker identify significant trends on where the market may lead. These trends will allow them to make any necessary adjustments to your investment strategy when selling your multifamily or mixed-use property. 

How IPRG Brokers Use Cap Rate

When working with IPRG, you get insights into real-time data on the local market trends to determine the best strategy to sell your investment property. Our brokers will evaluate your cap rate with the calculations mentioned in this article. Then, they will help you use that data to sell your mixed-use or multifamily property without leaving money on the table. So get in touch with our team to start calculating your cap rate and the rest of the selling process for your investment property.