I was browsing through this thread and noticed there was no mention of Capitalization Rate (Cap Rate), so I thought I would chime in on this for our newbie. Basically, the Cap Rate is the yearly rental income minus the regular expenses (including taxes, maintenance expenses and other expenses but NOT including mortgage expenses) divided by the purchase price. So, if you bought a home for $100,000 with a monthly rent of $1,000 and monthly expenses of $300, the cap rate would be 12*(1000-300)/100,000 = 8.4%. Note, this calculation does not factor in cash flow.

The better long term investments have positive leverage, this is where the cap rate is larger then the mortgage rate. With positive leverage, you will build wealth even if the property does NOT appreciate in value. Most “investing” the past few years has revolved around building wealth with the property going up in value, but this is not the only way to build wealth, positive leverage could still lead to wealth building in a declining market. The larger investors that purchase commercial, retail and multifamily properties all focus heavily on cap rate and verifying the stated cap rate is correct.

With my investments, I was not able to achieve positive leverage, but I was able to get close, having a ~5% cap rate and ~6% mortgage rate on average across 4 properties. Over time, the rent should increase which would put me into a positive leverage state if the expenses do not rise to quickly (taxes and insurance are the largest expenses). I am in position to hold all of these investments for a good period of time as they are cash flow neutral since I put 20% down on each.

The biggest concern for me is always making sure I have a tenant. I became a Florida Real Estate and Mortgage Broker so I could earn commissions on all of my own transactions here in Tampa and help other do as I did. Now, I created a tampa property management website to better advertise the properties and further help investors maintain high occupancy rates. While many may feel property managers charge too much (sometimes they do), if a property manager is profecient at the most critical aspect of the job, maintaining high occupancy rates, they more then pay for themselves. There is nothing worse then an investment property sitting vacant for >3 months as this will diminish wealth unless the appreciation rate is outpacing the expenses (not likely in 2006 in the US, can’t speak for AUS though).

Rob
Rent New Tampa
Florida Real Estate Broker
Mortgage Broker