Cash Flow Investor

Many investors that buy 3/1 homes eventually want to move up to larger investment properties. Buying larger properties isn’t tremendously difficult but does require more due diligence and that you learn some additional terms.

One of the most overused terms is cap rate . So, lets define cap rate and how it is used to determine if a property is a good investment.

The cap rate is simple, divide Net Operating Income (NOI) into the sale price. Thats the cap rate.

For example;

If a property has NOI of $100,000 and the sale price is $700,000 the cap rate is, NOI divided sale price so the cap rate for this property is 14%.

But what does the cap rate mean and how do you use it to determine if a property is a good investment.

But first what is cap rate, my research says that the cap rate is the return you would get in one year if you purchased the property with cash. So while cap rate is a good starting place for determining rate of return when financing a purchase, most people don’t buy large properties with cash so you need more info.