RETURN ON INVESTMENT (ROI)

The central issue in investing in rental property is in determining the value of investment; the income produced by the property. Investors call this the capitalization rate - cap rate for short. A quick way to determine the value of a property is determine the ratio of rental income to purchase price with anything exceeding 10:1 indicating a greater value; or put another way the property is worth 10 times rental worth. While this sort of estimate is a good for a rough estimate it is not a very good gauge for determine a property’s value. The cap rate is rental income, after expenses, divided by the cost of the property. In more formal language the cap rate is the net operating income divided by the value of the property. The capitalization rate is considered a reliable estimate and it is used by real estate investors, commercial lenders and appraisers. It may be counter-intuitive but the investment aspect of this rental property is not the mortgage but the amount used as a down-payment. If, of course, you run a negative monthly balance then you are investing more into the property.