Rental property is a valuable investment that can help you earn money and protect your wealth. However, not all rental properties are made the same. Some locations are better than others, depending on the type of tenant you’re looking for. One way to look at the value of an area is by calculating its “cap rate.” Check over here to explore more about cap rates and why they matter when picking out a rental property in 2021.
What is Cap Rate?
A “cap rate” is the ratio of net operating income (NOI) to property value. It gives you an idea of how much cash flow a particular property will provide you considering its market value.
- Also Read: How to Choose Your Property Valuer in 2021
Factors That Determine the Range of a Good Cap Rate
1. Risk Tolerance
The cap rate you can get will depend on what kind of risk is associated with the investment. If you want to invest in a developing neighborhood where rents are rising quickly, but there’s also an increased chance for crime, your cap rate might be lower than someone who invests in an established area that doesn’t experience any changes or fluctuations.
Different areas have different market values, which means they can also yield different returns on investment for your rental property. If you invest in a lower-income area with high unemployment and little demand for rentals, your cap rate may be lower because it’s tough to find tenants who can afford to pay rent on time each month. On the other hand, if you invest in a higher-income area with many renters, your cap rate may be relatively high because the demand for properties is greater.
3. Property Type
How much can you charge in rent for a single-family home versus an apartment building? What about a duplex or triplex compared to six units all together? Depending on the market and your strategy, these factors may impact how high of a cap rate you receive.
The more features a property has, such as additional amenities like a swimming pool or fitness center, the more expensive it will be to maintain. This can lower your cap rate since you’ll have higher expenses each month, reducing how much net rental income is left over for you after subtracting all costs.
Working with a real estate agent is an excellent way to find out what kind of returns on investment are possible in 2021. Whether you’re new to the market or a seasoned real estate investor, an agent can help you pinpoint precisely what cap rate and NOI will give your property its best return on investment in 2021.
4. Timing Your Acquisition
A market where demand for rentals is high and low vacancies will have a higher cap rate than one with the opposite conditions. If you’re trying to get into a new neighborhood or expand your property portfolio, timing your real estate investment can be crucial in 2021.
For example, if you buy early on when there’s less demand for rentals, your cap rate may be lower than someone who buys later when the market is more competitive.
When is Cap Rate Used?
Cap rate is usually used to compare the relative value of different properties or neighborhoods. It can be a helpful tool if you’re trying to determine what kind of return on investment your property might give you in 2021, but it’s not an exact science and depends mainly on how risk-averse you are when looking for investments.
What is a Good Cap Rate for Rental Property in 2021?
A good cap rate for a rental property in 2021 returns a profit and protects your wealth. It will depend on the location, type of investment, timing, market conditions, and many other factors. If you’re thinking about how to value a piece of real estate or what kind of return you can earn in 2021, it can be helpful to work with an expert in the field. A real estate agent will know how much cap rate is possible at a particular time and location. They’ll also help you determine what kind of return on investment your rental property needs based on its condition, amenities, and other factors.
Next, you can read the following as well:
- Benefits of Using A Property Management Company
- How to Improve the Curb Appeal of Your Property
- The No-Confusion Guide to Loan Against Property Eligibility and Documents Required
- 10 Great Tips for Selling Your House for Top Dollar