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What is cap rate and why does it matter?

Posted by Veronica On May - 22 - 2015

Balancing Home Symbol And PercentageCapitalization rate, which is usually called the cap rate, is a term that is commonly used in the investment real estate industry. The point of it is to figure out the total worth of any properties that are bringing in income. Essentially, the cap rate tells you how long it will take to break even on this purchase. If you are considering buying any type of investment property in Maine, you should learn a bit about the cap rate and why it should matter to you.

Cap Rate Calculation
To get the cap rate, just divide the annual net operating income by the property’s purchase price. So if you are able to rent out a property for $1250 every month after expenses, and the price to buy the property is $300,000, your cap rate would be 5 percent. This means the amount of time it will take to break even is 20 years.

Remember that the annual net operating income is the amount you get from your tenants after you pay for expenses like regular maintenance, repairs, insurance, and the costs from any property management company you use. You should also keep in mind that cap rates can change over the years. Any time the rent changes, the cap rate will adjust, too. So if the rent on your $300,000 property goes from $1250 to $2500, the cap rate goes up accordingly to 10 percent. As a result, you’ll find it should only take you 10 years to break even instead of 20.

Knowing the Cap Rate Can Help You Invest Wisely
You need to know a lot of facts about real estate before you buy any type of property in Maine. But one of the most important things to know is the cap rate, since this will give you an idea of how risky the purchase is. It’s crucial that you keep in mind that a secure investment has a cap rate of 5%. But this can be hard to find, which is why the most common real estate investment has a decent cap rate of 10%. Finally, a risky investment in this field has a cap rate of 20%. This is good to know if you are looking to play it safe when buying property in Maine.

An additional reason to know a bit about cap rate is so you can look at trends in the area where you want to buy. For example, cap rate compression, or low rates, can indicate that the market is getting better. This can help you make a decision on when and where to invest in real estate.

If you are still not sure how the cap rate works, you should consult an experienced real estate agent. In fact, even if you are confident about how to calculate the cap rate, you should still set up a meeting with a real estate agent in Southern Maine so you can find out more about the area before you make an investment.

About the Author

As a broker specializing in multi-units and single family homes in Southern Maine, Veronica Schneider joined the real estate industry in August of 2004 bringing with her over eight years of experience in real estate management. You can find Veronica and Green Tree Realty on Facebook, Twitter, Google+, Pinterest, and LinkedIn.

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About Us

As a Portland Maine real estate agency Green Tree Realty specializes in Residential and Investment real estate for southern Maine buyers, sellers and investors looking in the Androscoggin, Cumberland and York counties residential and investment markets.

We're Located At:
522 Washington Avenue,
Portland, ME 04103


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