The residential real estate market is so big in the US that you have to look for opportunities. The opportunities that can bring you a huge return on single-family home investment. And real estate investing is a great way to do so.
Now the question is that what is the upside scenario in investing in single-family homes? What kinds of yields can single-family home investors can expect? How does investing in single-family unit work?
Investing in single-family homes is always the best investment. The answer to all these questions is that you can either invest through the stock market or as a direct buyer. This kind of approach generally offers an immediate cash flow and equity builds combined with appreciation. But before that, you should know the rate of return on the capital you invest in order to maximize your success. In particular, the property’s revenue potential can help you determine if you want to purchase it and invest in it.
However, two of the economic metrics are used to make these determinations. One is known as cap rate (i.e. capitalization rate) and the second one is the cash-on-cash return rate.
What is Cap Rate?
It is defined as the measure of the profit you can gain from a rental property. More or less, it’s the indication of the percentage profit an owner can expect after a certain time period. Remember, higher the cap rate on property, higher will be the project lucrativeness. Nevertheless, the risk is also higher with higher cap rate.
Therefore, you need to take a close look at your own finances and ability to secure financing. Think of do you want to manage the properties yourself or hire a property manager for this job? Evaluate how you want to get started. No matter you live in Quincy, Braintree, Weymouth, or South Shore, it is a better idea to hire the property managers who are the real experts.
Moving back to cap rate formula, it can be calculated as annual net operating income/asset value. This is the final income received after expenses have been paid. For example, if $500,000 is the purchase price of a property, and $24,000 is the expected net annual operating income, then cap rate would be 4.8 %.
Now you must be thinking what should be the good cap rate for my own property. Well, it depends on the type of property, its location, and the condition of the property. Lower the cap rate higher would be the property value. Whereas rental properties in the U.S tend to have a cap rate a few percentage points above or below the mark.
What is Cash-On-Cash Return?
In comparison to cap rate, cash-on-cash return is more specific measure of the performance of a real estate investment. Thus, providing a number that determines the relationship between the cash investment and cash flow. It is calculated as an annual net operating income / total cash investment.
Note: A good CoC return according to experts is at or above 8%.
Reinvesting in Single Family homes can be a financially reward experience. To learn more how single family homes are great investment, here are the couple pointers that single-family home investors should know.
- First and foremost, single family home rental individuals / companies should know that buying a fixer-upper would require more cash. That being said, if buying aggressively, or fixer-uppers, you may want to have private investors or an investment partner to help you out in real estate deals.
- Secondly, investors should make sure that their credit score is in the middle 700’s or greater because this helps with getting low interest rates on loans and a large down payment.
- Beforehand planning helps us to achieve our goals with ease and promptness. If you note down an investment plan, it will help you stay focused, set goals, objectives and debrief the entire real estate project i.e What do you want for a return; 10% 15%? What is your investment budget? Etc.
- Your properties that include out of state properties may offer better investments than the local market. Conduct your property search for properties that will meet the return. Don’t forget to look at both expected income and all expenses, cap rate and cash-on cash return in brief.
- As told above, you can invest either through stock market or as a direct buyer. Let’s say if you are investing as a direct buyer, you will need 20 to 25 % as a down payment to get possession and think of best possible ROI.
- Consult with the real estate professionals to understand if you are able to be a landlord or not? Perhaps having a property manager on your team will do this better as there are a lot of Tenant/Landlord laws you need to stay on the right side of.
- You can share your concerns by talking about single family home plans with the real estate experts in your area. They can help you with this. If you are a Cape Cod resident you can contact with Real property managers who will help you get better ROI on Cape Cod Vacation Rental Property Management, rental property management and property selling. You will get to know the perspective on where the average numbers were in years past, where they are today and where they expected to be in the years ahead. Those insights shared by the professionals can help you make a fully informed purchase decision.