Why CAP RATE matters for 2022

Chad Carson

Lined Circle
Lined Circle

What is a Cap Rate?

A cap rate is simply a formula. It’s the ratio of a rental property’s net operating income to its purchase price (including any upfront repairs): Cap Rate = Net Operating Income (NOI) ÷ Purchase Price

As an investor, you have to protect yourself against the possibility of losing money.

Cap rate is a indication of risk.

A higher cap rate means an investment is more risky. A lower cap rate means an investment is less risky.

There are 3 major factors that affect cap rate: 1. Macro-level economics and demographics 2. Micro-level market influences 3. The type of property

How to Use Cap Rate as a Rental Property Investor

1. Pick a market, submarket, or property type to invest in 2. Set goals and perform analysis for property acquisitions 3. Decide to sell an existing property

A Cap Rate Helps You Make Good Decisions

And good decisions lead to you accomplishing your overall real estate and financial goals.

With investment decisions, there are no clear-cut answers. A “good” cap rate will depend on your personal investment criteria and preferences.

What's a good cap rate for rental properties?

How to Run the Numbers

Cap rates are important, but they’re one of many criteria you should use to evaluate a purchase. You can also read my article How to Run the Numbers – Back of the Envelope Analysis for a more comprehensive look at my approach to property analysis.