This helps you understand how profitable a property is in a more practical context.įor example, let’s say that after financing costs your yield on a $1M property is only 1%, or $10,000. mortgage interest costs) and compares the income from the property to your down payment or equity rather than the total cost of the property. A levered yield takes into account your costs in financing the property (e.g. There is an additional type of yield called a levered yield. Cap rate can change from year to year depending on the valuation of the property while your yield will generally stay the same unless your income significantly changes. The main difference between cap rate and yield is that cap rate is a valuation based on current income at current prices whereas yield is based on current income vs your initial investment. What is the difference between cap rate and yield? At minimum, your cap rate should be greater than your cost of financing: for example, if you have a 5% mortgage then a property with a cap rate below or equal to 5% is expected to be a money-losing investment. Ultimately, a good cap rate for your personal investment will have a wide range depending on your investing strategy, area of purchase, and many other factors. Either case is not necessarily good or bad, but they mean that you need to do more research on why the property is being valued the way it is. If the cap rate is above that of similar properties, the property might be undervalued. If the cap rate of your property is below that of similar properties, it might be overvalue. You can find a more accurate range by researching cap rates for properties similar to yours in the same area. What is a good cap rate?Ī good range for cap rates is between 4% and 12% depending on the area and property type. The range of cap rates will differ across different property types, time periods, economic conditions, locations, and many other factors that play a role in determining the price or risk of a property. What are some factors that affect the cap rate?
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