Considering a Good Cap Rate!
It is important to clarify from the beginning that you can not always use the cap rate as an accurate parameter to put all your attention in a business, for example, if the property in which you are interested has an irregular or complicated cash income the best option for it would be to use another method such as band of investment method or Gordon Growth model that allows you to evaluate correctly and thus make a decision. Now, this cup determines a limit index which is a measure of what could result from your money invested in the short term; A simple way to see it is if we assume that you bought a property for $ 500,000 with a cap rate of 7%, this means that you would get $ 35,000 back after the expenses of each year.
The vision that you have of the cap rate will depend on the information that you have on the subject, in addition to the tendencies that there are in the fair market at the moment that interests you some property; In certain occasions, this parameter is able to give you an idea of where the market is moving so you will have a better picture of what could happen. The important thing here is that you understand that in a hypothetical situation where you are studying two houses in which their histories and prices are relatively similar the most recurrent way to discard is comparing the capitalization rate of both, so, it is not a simple mathematical equation, on the contrary, you must have confirmed data, projections and take into account the
risks that any investment could have.
In a market as fluctuating and changing as it is real estate, it is essential to be attentive, know your environment, know what to look for and what to discard, so the use of calculations and estimates are an essential tool so that, time to negotiate, have a percentage of security that takes you away from the idea that you will have some loss or that you will make a mistake.
“If you want to be rich, do not learn only how to earn, but also how it is invested.”
American Politician, Polymath, Scientist and Inventor