Find Profitable Rental Income Properties in Las Vegas
Find Under Valued houses higher Cap Rates
This measure is computed based on the net income which the property is expected to generate and is calculated by dividing net operating income by property asset value and is expressed as a percentage. It is used to estimate the investor's potential return on their investment in the real estate market.
While the cap rate can be useful for quickly comparing the relative value of similar real estate investments in the market, it should not be used as the sole indicator of an investment’s strength because it does not take into account leverage, the time value of money, and future cash flows from property improvements, among other factors.
The capitalization rate is calculated by dividing a property's net operating income by the current market value.
This ratio, expressed as a percentage, is an estimation of an investor's potential return on a real estate investment.
The cap rate is most useful as a comparison of the relative value of similar real estate investments.
The net operating income is the (expected) annual income generated by the property (like rentals) and is arrived at by deducting all the expenses incurred for managing the property. These expenses include the cost paid towards the regular upkeep of the facility as well as the property taxes.
The current market value of the asset is the present-day value of the property as per the prevailing market rates.
A look at the formula indicates that the cap rate value will be higher for properties that generate higher net operating income and have a lower valuation, and vice versa.
The dividend discount model (DDM) is a quantitative method used for predicting the price of a company's stock based on the theory that its present-day price is worth the sum of all of its future dividend payments when discounted back to their present value. It attempts to calculate the fair value of a stock irrespective of the prevailing market conditions and takes into consideration the dividend payout factors and the market expected returns. If the value obtained from the DDM is higher than the current trading price of shares, then the stock is undervalued and qualifies for a buy, and vice versa.
(Required Rate of Return - Expected Growth Rate) = Expected Cash Flow / Asset Value
This leads to the capitalization rate being equivalent to the difference between the required rate of return and the expected growth rate. That is, the cap rate is simply the required rate of return minus the growth rate.