Is Owning Rental Property a Smart Move for You?
Property ownership is a big investment and responsibility. It’s important to calculate the costs and potential ROI. Income from a rental property allows you to pay down any loans from your initial investment, maintain upkeep, and hopefully, have extra left over.
But how can you determine this before buying a rental property?
There’s a simple formula for estimating if a property will be worth it. It’s called the capitalization rate (or cap rate).The cap rate is the most common metric for measuring the value of a potential real estate investment. It’s a calculation of the returns the property will produce each year, or net operating income (NOI) in relationship to its operational costs.
Net Operating Income / Current Market Value = Capitalization Rate
While there are many variables to consider when calculating the cap rate, doing so can be crucial to understanding if buying a rental property is a good investment.
At HomeVestors®, we recommend you consult with a professional financial advisor to determine if rental property ownership is a smart financial decision. They’ll also likely be in a position to factor in potential tax benefits that can add to your bottom line.