Analyzing real estate investments is important. By doing so, you’re likely both to make smarter investments—and to avoid costly mistakes. Unfortunately, most individual real estate investors have no idea of where to even begin. This is where Blue Coral comes in, with our consultation your second home will be the best investment you will ever make.
We Carefully Calculate the property’s income capitalization rate
A key factor in your property’s return is its operating income. Essentially, the operating income is just the rental income less the property’s expenses (maintenance, property taxes, insurance, and so on).
The common way to look at a property’s operating income isn’t as an absolute dollar amount, however. Rather, you look at the property’s income capitalization rate. The capitalization rate (also referred to as the cap rate) is a simple percentage equal to the annual operating income divided by the property’s value.
Example: Just to keep all the numbers and arithmetic simple, say you buy a rental property for $100,000 and the property generates $6,000 in operating income. The capitalization rate equals 6% because $6,000 divided by $100,000 equals .06.
This was an example of Long Term Rental unit. Annual returns and CAP rate is calculated based on full value of the fully paid home.
Short Term / Vacation rental situation is exactly the same method however numbers are higher.
Example : Just to keep all the numbers and arithmetic simple, say you buy a rental property for $500,000 and the property generates $90,000 in operating income. (after expenses) The capitalization rate equals 18% because $90,000 divided by $500,000 equals .18. This means an eye opening 5,5 years maturity on entire investment.
In Plain English, if the property is paid cash in full, owner will generate 18% income year after year for the investment. This calculation is based on hard data considering 55% occupancy (very conservative) annual.
If property was purchased with a mortgage, paying % 40 down payment, (monthly payments would be average $ 2700) CAP rate would be effected by Mortgage interest however return against the initial capital will be $ 57,600 (same $ 90 K annual operating income after mortgage deducted).
Which means in Plain English for the $ 200,000 down payment annual income is now $ 57,600 which is staggering 28.8%.
Try and make that with Stock Market.!
Blue Coral property’s appreciation rate
Operating income isn’t the only profit a real estate investor enjoys. Traditionally, real estate investors also see their properties appreciate over the long haul. On average, most properties will appreciate by the inflation rate. So that’s a good starting point for an appreciation rate guess. But some properties will appreciate (if only for short bursts of time) by more than the inflation rate. And then other properties won’t appreciate and may even fall in value, as happened during the Great Recession.
Forecasting appreciation rates is obviously difficult. Blue Coral Properties as they are upgraded with highest quality materials creates the best appreciation rates.