How to Calculate Capitalization Rates on Rental Apartments
The key to real estate investing, like most other investments, is value. The ability to locate properties which are undervalued is essential. This is easier to do if you are only valuing one property, but a little trickier for an apartment complex with multiple housing units. For that, real estate investors use a metric called the capitalization (CAP) rate. The CAP rate helps to compare rental properties based on both the value of the land and how much income they can produce. Here's how to compute it.
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Instructions
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Find the overall value of the income property. You can use the most recent price the property was sold at as a proxy. For the purpose of this explanation, assume the apartment complex was sold for $1,000,000 and has 10 units.
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Determine the net operating income for the property. Ask the Realtor or apartment manager/owner for the Net Rentals Realized by owners. Let's say the monthly income for the apartment complex is $10,000, but the mortgage and all other expenses are $8,000. The Net Operating Income would then be $2,000 per month, or $24,000 per year.
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Divide the net operating income ($24,000) by the price (value) of the apartment complex to arrive at the capitalization rate. In this case, the operating income ($24,000) / price of apartment complex ($1,000,000) = .024 or 2.4 percent.
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