A CAP RATE is the rate of return you receive on your investment. So, if you buy a $200,000 property and it nets you $12,000 – that is a 6% cap rate.
Unfortunately, investment properties frequently post a cap rate that is NOT accurate. The most common element of this “misinformation” concerns property expenses. Expenses should be all inclusive and reasonable. The lower the expenses, the higher the net return to the owner and the higher the net return to the owner – the higher the cap rate.
If a property expenses sheet shows $20,000 in expenses – is that the whole story? Probably not. Large capital items such as roofs, HVAC equipment, etc., should have an annual savings account for future expenditure. If a roof will cost $50,000 and will last 20 years and the expense sheet shows no expense for a roof – then you are not seeing true expenses.
Take your time and do a thorough analysis of the property expenses – by doing so you will make a far wiser decision on the real value of the property.