Think of real estate investment as a game where there are plenty of options for you choose from. The real estate market has many different types of homes and structures that you can buy ranging from duplexes, single-family units, apartment complexes, commercial buildings, strip malls and so much more. With so many options comes many ways in which you can invest your money. You can buy and flip homes or buy and then keep up the homes, for example. Below is an example of how you can make an investment in apartment complexes and reap the lucrative returns that it yields.
The value for an apartment complicate is very objective compared to that of a single-family unit. consequently, its value can be calculated using an equation: PP= NOI ÷ Capitalization Rate
buy Price (PP)
Net Operating Income (NOI)
Capitalization Rate (CAP)
The character’s CAP rate is equal to its NOI divided by its buy price. In general, the risk is higher if the CAP rate is high. The reverse is true in addition. A lower CAP rate method that there will be a greater change in the NOI on the character’s value.
Adjusting the NOI on a character will exponentially decline (or increase) the character’s value. Confused? Let’s look at an example. An investor paid $1.6 million for an apartment complicate. The CAP rate is 6%. Calculate the NOI. Here is the equation:
NOI = CAP rate X $1.6 million (buy price)
NOI = .06 X 1,600,000
NOI = $96,000
Makes sense, right? Now, if a 5% increase in rent is allowed by the market (assuming that all expenses remains the same, of course), the NOI increases to $100,800. This is an increase of $4,800 ($100,800 – $96,000). That’s a great increase, but the thing to observe in this example is how the $4,800 will increase the character’s value: $4,800/.06. At the 6% CAP rate, adding on the additional $4,800 just increased your character’s value by $80,000!
This is only a simple example to demonstrate the relationship between the character’s income value, its CAP rate, and the NOI. Effective management and planning can considerably increase a character’s value. A similar rule can be applied towards other types of purchases in real estate investments.