Properly Pricing Your Rental
Rental pricing is critical to the success of your real estate investment venture. Higher than market prices, given the condition, location, and amenities of your property, will deter potential renters and leave your property vacant longer than necessary, with an accompanying high turnover rate.
Under-pricing your rental can be equally disastrous and leave you with a negative cash flow and/or less than optimal returns. Take an impartial look at the condition of the property, demand for the location, and the economic direction of the community. Consider population growth, unemployment rates, and industry growth.
Understanding cap Rates
You hear this term all the time, but what exactly is the ‘cap rate.’ The abbreviation is short for capitalization rate. The cap rate is what investors use to gauge the income of the property relative to its value, often the purchase price or appraised value.
The rate is calculated by dividing the annual net operating income (NOI) by the value of the property. The more risk that a project represents for the investor, the higher the cap rate that will typically be demanded. The average cap rate for an area indicates the level of risk and return that is most common for the community and property class.