In this tutorial video, we will show you how to use the Cap Rate Calculator
available at Hauseit.com. If you're not already on the calculator page, you can
get here by typing in Hauseit.com in your browser bar or simply by googling
'Hauseit' spelling is up here. Now once you're on the Hauseit website, go
to calculators navigate towards the by tab just hover over that and down here
on the right you will see the cap rate calculator. While we're here worth
pointing out but there's a couple other calculators you might be interested in
if you're buying a rental property. The first thing you'll want to look at is
the buyer closing cost calculator and that's actually important because you
will need that as one of our inputs in the cap rate calculator itself. If you're
buying a house or condo in the city, in New York City and you're financing your
closing costs will be around 4% but they do vary based on the amount you're
financing as well as the specific purchase price as it relates to the
mansion tax. The mansion tax was recently updated in New York City and it was
changed from a fixed tax of 1% regardless of purchase price above a
million to eight separate tax brackets. So if you want to learn more about the
mansion tax and how that's changed how it will affect your purchase in New York
City you can consider trying out the mansion tax calculator. So going back to
the cap rate calculator let's start by just giving a brief overview of how it
works and what the point is of the calculator itself. So the main reason why
we're looking at this again is because we're probably considering a number of
real estate investment opportunities and we want to figure out a way to compare
opportunity A versus opportunity B or potentially compare investment
opportunity in city A versus City B. The cap rate is a metric that allows us to
compare real investments and determine which one may
have better fundamentals and might have more attractive upside. Specifically the
capitalization rate is a very basic formula which is essentially a rental
properties net operating income divided by the purchase price. So for example if
your income net of expenses is 50k and you've bought a $1,000,000 property your
cap rate is 5%. Customarily speaking a cap rate is supposed to be in line with
the incremental risk of an opportunity, so if for example you're in New York
City which is considered to be a pretty low risk environment you have a strong
economy, good fundamentals, cap rates should be pretty low. If we compare that
to another city like Detroit we would expect Detroit to offer significantly
higher cap rates and that's really just to compensate us for the incremental
risk associated with the city specifically you have a less robust
economy, you may have a population decline, and you have other deteriorating
fundamentals which certainly do mean that investing in real estate in general
is riskier there versus a city like New York. That being said the cap rate
calculator is extremely helpful in general regardless of whether you're
looking for an 8 percent cap rate or 4 percent cap rate it will help you
accurately compare investment A versus investment B. So let's go ahead and give
it a shot here we're gonna come up with a bunch of assumptions and by inputting
all of these things over here we are going to generate the cap rate
calculator returns specifically our annual NOI, our cost basis, and then
essentially the cap rate is the annual NOI divided by the cost basis. Very
important to mention that the cap rate itself is not related to the financing
structure of a deal and that's because many investors will have their own
preferred methods for financing they'll have different costs of leverage and
financing so on and so forth. So if the cap rate factored in financing
structures it would be impossible for investor A
to compare her or his cap rate returns to to those of investor B. So again a cap
rate, it is in figure that is a standalone figure that's not related to
the underlying fundamentals of the financing structure being considered
it's basically a cash return type of analysis. So if we are to go ahead and
use the cap rate calculator let's go ahead and just plug in a purchase price
of eight hundred thousand and for closing costs assuming we're buying a
condominium let's quickly use the buyer closing cost calculator to come up with
an estimate there
So let us take a pretty typical scenario here we're buying an $800,000
condominium and we are financing 80%. It's not new construction keep in mind
if it's new construction you'll see that the closing costs go up from 3 about 3.2
percent to about 5.4 percent and that's because the buyer as opposed to the
seller usually will be paying the transfer taxes if you're buying a new
construction condominium. So we have an estimate here of about 26K for the
buyer closing costs so if we go back into the cap rate calculator let's put in
26,000. Now for renovation costs let's assume this apartment maybe needs a few
touch-ups how about a new floor and repainting so let's say about 15,000 and
then for a monthly rental income we can completely make this up let's go ahead
and say it's 5,000 which for New York City would actually be pretty high very
high actually for an $800,000 property. For annual expenses property taxes let's
just plug in something like 7K. Property insurance is your HOA insurance it's
usually around a thousand or two thousand a year. So let's just put in
1250 you can get a more accurate estimation of this by going online
there's a number of companies that will actually give you the ability to both
create a quote and actually purchase it immediately thereafter. So if you want
super accurate inputs here feel free to just Google that. Now for common charges
we can just go ahead and assume something here say around 8k a year. That
would be about seven, six hundred, seven hundred dollars a month
maintenance and repairs we're just gonna plug in a random number
3k so let's assume that you need to hire a contractor for a week or two to do
some various repairs maybe you had to buy a new washing machine or something
like. That utility bills and other expenses, this this is a an interesting
field because in theory if you have your tenant paying a lot of these then really
you shouldn't be putting them here so let's just say utilities things that you
have to pay are a thousand dollars. Now the property management fee and
vacancy rate is up to you the vacancy rate is really meant to incorporate some
degree of adjustment for the reality that maybe may be the case that you're
actually looking for a tenant for a month maybe your new tenant moves in two
weeks or a month after your old tenant moves out. So if we were to say that your
apartment is vacant on average of one month a year we would do 1/12 which is
around 8 percent so our vacancy rate would be around 8 percent. Now let's go
ahead and put zero for the property management fee real estate is a pretty
local game so if you're just an individual investor and you live in the
area you have only a few of these properties you may very well be actively
involved and you you probably won't have a property manager. If you're doing this
in large scale you might have a team that might charge you a management fee
and certainly if you're out of state out of town and you cannot easily access
your properties and manage them yourself you may want to plug in something here
for the cost of a professional manager. So we filled in pretty much everything
here in the cap rate calculator and it looks like outright our cap rate is
around 4.1 6% now in terms of the cost basis here it's 841 thousand dollars. If
we figure out how that's calculated it's basically our purchase price plus
closing costs and renovation costs. So that's 826 plus 15 exactly matches 841
Now for our monthly net operating income this is computed by taking our monthly
rental income and then essentially dividing that or rather dividing the
expenses by 12 and then deducting that from the rental income. So this cap rate
is actually pretty attractive if we're in New York City. In New York City for a
typical condominium especially if you're in somewhere like Manhattan you're
talking about low threes possibly even as something that's better than average
once you get north of 4 it's an exceptional opportunity you can
obviously achieve a higher cap rate by pivoting into parts of Brooklyn, Queens,
the Bronx, boroughs other than Manhattan or you could possibly pivot into the
multifamily space. Multifamily properties usually have a higher cap rate they are
more attractive primarily because you have arguably a smaller buyer base so a
lot of buyers are not interested in having to deal with a boiler issue or
fixing their roof or working on a facade. So you certainly exclude a lot of
foreign buyers or more conservative investors from the buyer base and
furthermore you know multifamily properties do have arguably an
incremental degree of risk when it comes to tenants making repairs and things
like that. So you should expect the multi-family property to have a slightly
higher cap rate but you know in our opinion in general if you can find the
right opportunity you're gonna have substantially similar risk to an
individual apartment especially if your your tenants have the same income
earning power as tenants who would be buying something in Manhattan in a condo
for example and if you're able to manage the property and you have some
experience in that or you have the appetite to learn it should just give
you a nice windfall a higher cap rate compared to your typical apartment and
again if you're in a different city this cap rate is gonna look really low. So if
you're in you know say Chicago or you're in you know somewhere in a city that is
not necessarily Tier one city in terms of income statistics and economic growth
and population you're gonna be getting a much higher cap rate. Final reminder here
so you can actually email yourself the results so if you if you want to do this
for a couple of investment opportunities you can email yourself the results so
you have them for your records you can also print a PDF and if you want to just
start again you can click the reset button down here on the right. If you
have any questions about how this calculator works or how you can use it
in your own pursuit of real estate investments, leave a comment below the video. You can
also give us a call, email us, text us if you're in New York City
there are some ways we can help you to save some money on the purchase thereby
increasing your actual returns for your investment. So give us a shout if you are
in the city or if you have any questions and we wish you the best of luck out
there as you pursue your real estate endeavors!