Cap rate

[Daniel Thomas]

I am just starting out. I currently own two properties and am looking to get serious and start growing my portfolio. Should I look for properties with a cap rate of 10? For example, purchase price is 84000 then rent should be 700 a month. Thanks for all the input.

[David Beard]

Welcome to BP, fellow Louisvillian.

Cap rate is "net operating income" after expenses, divided by your all-in costs to own the house (purchase+closing costs+rehab expenses).

Generally expenses can be assumed to be about 50% of rent (taxes, insurance, repairs, vacancies, turnover expenses, replacement reserves on roofs, etc.), so you need $1,400 in monthly rent on an 84K house. This equate to a 20% gross yield, and a 10% net yield (cap rate).