|Great investment property deals
in short supply
For long-term investors who plan to hold the property, Crowe uses
the capitalization-rate or cap-rate formula. The cap rate is defined
as the ratio of yearly net income to the value of the property.
It is expressed as follows:
The cap rate offers a way to compare deals based on
the value of the property regardless of the amount of down payment
or the interest rate on the loan. While higher mortgage payments
would change the return on investment, Crowe says, "It doesn't
change the cap rate."
If you're selling a property, says Crowe, "It's
better to have a buyer willing to accept a lower cap rate. But if
I'm buying, I want a high cap rate." For instance, if you buy
a property with a cap rate of 8 percent and did nothing to it but
raise the price, the cap rate drops to 7 percent. You've made a
Cap rates vary, depending on the region in which you are investing.
"In the Midwest region a cap rate of 7 percent or 8 percent
is considered good," says Crowe.
On the coasts, a cap rate of 6 percent is more common. A decade
ago a 10 percent cap rate was customary, says Crowe, who offers
real estate investment advice on his Web site www.dougcrowe.com.
Crowe has invested in real estate for about 19 years and taught
investing in Chicago for about five years.