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What The Cap? Cap Rates Explained

Posted by chris on March 5, 2019
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Jeff Williamson

Cap Rate is short for Capitalization Rate; it’s a fancy word for “ROI” or return on investment when it comes to your real estate investment. As an example, picture you having $1,000 cash in a bank account earning 10% interest. The simple math is $1,000 x 10% = $100. In this instance the hundred dollars would be your return on investment or ROI. Let’s say you have a 10 Cap property that you purchased for $1,000. This would subsequently mean that your ROI is $100. The calculation is $1,000 less mortgage payment, utilities, insurance, taxes, operations, management, and the net result after all expenses and debt service is $100. Because the $1,000 is in real estate and not cash-in-bank, you can’t call it 10% interest. This is a very simplistic example because the actual Cap Rate valuation is more complex, but the bottom line is return-on-investment. If our subject $1,000 property was purchased at a 25% down payment, this means that $1,000 x 25% = $250 cash and a $750 mortgage. So in actuality, the $100 return is 4 times the $250 cash investment or 400% ROI.

This is the beauty of real estate investing in the sense that you can leverage your money for increased returns in a way that is far less volatile than speculating on the stock market. Given our current position in a buyer’s market where we are experiencing downward pressure on sales, now is the perfect time to be taking steps towards purchasing your first investment property or diversifying your real estate portfolio with additional acquisitions.

No matter where you are, The Beyond Properties Group can help you put together a realistic plan based on a proven track record of success in real estate investing.  Together we can make your dreams a reality.  Call Jeff at 604-807-0004 today.

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