There are man advantages to owning real estate.  Buying a home is one of the biggest investments that most people will make in their lifetime.  Over the next couple of weeks I want to discuss the benefits of owning investment property, mostly I will be discussing the advantages of owning rental properties from a tax standpoint as well as for retirement.

Before discussing the tax and retirement benefits I want to talk a little about how we analyze investment properties.  There are many indicators we use to measure how well a certain property is performing.  Think of investment properties as tools, a tool that is used to build equity and wealth if managed correctly.  A lot of first time investors will only look at cash flow as how well a property is performing, this is not entirely the wrong approach but does not necessarily measure how well the property performs.  Today I want to discuss the Cap Rate and how we use this indicator to analyze properties.

The term "Cap Rate" is short for Capitalization Rate and is used by real estate investors as well as appraisers to evaluate value of properties.  The reason that the cap rate is a better indicator of performance is because it cannot be manipulated as easily as something like cash-flow.  An investor can change the actual cash flow of a property by putting more money down or possibly by getting more favorable terms on a loan which would produce a better cash flow.  The cap rate is calculated by dividing the Net Operation Income (NOI) by the Purchase price.  This will produce a percentage point which is your cap rate.  Keep in mind that NOI does not take into account any type of dept service, you only subtract your annual expenses from your gross income. 

 

       ____ __NOI___________     =    Cap Rate

          Purchase Price

Cap Rates will vary from market to market and even neighborhood to neighborhood but it is the best analysis tool to use when comparing properties side by side within a certain market.

Analyzing investment properties can be a fun process especially when you start to factor in Return on Investment and after tax cash flows.  If you are thinking of getting into real estate investments in Rexburg, Rigby, or Idaho Falls please call me and lets get the process started.  I can provide you with a comprehensive analysis that will allow you to make the best decision for your situation.