How can you find out how well an investment property is performing? Through a real estate ROI analysis! What are the top methods to calculate return on investment? Cash flow, cash on cash return, and the topic of this blog, cap rate!
Related: How to Calculate Return on Investment in Real Estate: 5 Different Ways
What Is Real Estate Cape Rate?
Real estate cap rate, or capitalization rate, is a return on investment metric that links the investment property’s gross rental income to its value. It is a ratio of a property’s net operating income (NOI) to its current market value (CMV).
Capitalization Rate = (NOI/CMV) × 100%
Net operating income simply refers to a rental property’s gross rental income deducted by its operating expenses. The current market value is the market value of a real estate property at a certain time.
What Are the Uses of Real Estate Capitalization Rate?
The most important use of real estate capitalization rate is as a return on investment metric. The higher a property’s capitalization rate, the more profitable it is. In the same token, real estate capitalization rate can also be used to compare investment properties. Once again, the higher the rate, the better the rental property.
Cap rate can also be used to estimate the payback period of a real estate property. What is the payback period of a property? It is the time required to pay off an investment. To find the payback period of an investment property using capitalization rate, simply divide 100 by the rate. For instance, if a real estate investor has a rental property with a 10% capitalization rate, it will have a payback period of 10 years.
What Is a Good Cap Rate?
What makes for a good cap rate? Generally speaking, anywhere from 8% to 12% is considered good for real estate capitalization rate. However, the US real estate market is wide and diverse. Due to the combined influences of the housing market dynamics, local economies, housing prices, and much more, a good capitalization rate can vary from area to area. Some areas, for instance, consider 6% to be a good capitalization rate.
Best Cities for Real Estate Cap Rate:
The cap rates included in this list are only averages. This means that an actual investment property in any of these cities will likely have a higher capitalization rate. The same goes for the cash on cash return on the list. All the cash on cash return numbers are equal to the cap rate values for each city because the data assumes that properties are purchased in cash. If an investment property is financed through a mortgage, the expected cash on cash return of the property will be higher.
Related: Understanding Capitalization Rate vs. Cash on Cash Return
But without further ado, here are the best cities for capitalization rates in the US!
1.) Dayton, OH
- Traditional Cap Rate: 13.68%
- Traditional Rental Income: $1,915
- Traditional Cash on Cash Return: 13.68%
- Median Property Price: $137,957
2.) Camden, NJ
- Traditional Cap Rate: 10.69%
- Traditional Rental Income: $1,334
- Traditional Cash on Cash Return: 10.69%
- Median Property Price: $94,139
3.) Texarkana, TX
- Traditional Cap Rate: 7.92%
- Traditional Rental Income: $1,978
- Traditional Cash on Cash Return: 7.92%
- Median Property Price: $190,184
4.) Paterson, NJ
- Traditional Cap Rate: 7.49%
- Traditional Rental Income: $1,724
- Traditional Cash on Cash Return: 7.49%
- Median Property Price: $164,543
5.) Naples, FL
- Traditional Cap Rate: 7.42%
- Traditional Rental Income: $3,308
- Traditional Cash on Cash Return: 7.42%
- Median Property Price: $427,369
- Traditional Cap Rate: 6.71%
- Traditional Rental Income: $1,057
- Traditional Cash on Cash Return: 6.71%
- Median Property Price: $135,287
7.) Redford, MI
- Traditional Cap Rate: 6.7%
- Traditional Rental Income: $1,120
- Traditional Cash on Cash Return: 6.7%
- Median Property Price: $102,698
- Traditional Cap Rate: 6.58%
- Traditional Rental Income: $1,217
- Traditional Cash on Cash Return: 6.58%
- Median Property Price: $116,521
9.) East Orange, NJ
- Traditional Cap Rate: 6.5%
- Traditional Rental Income: $1,050
- Traditional Cash on Cash Return: 6.5%
- Median Property Price: $95,000
10.) Eight Mile, AL
- Traditional Cap Rate: 6.47%
- Traditional Rental Income: $1,167
- Traditional Cash on Cash Return: 6.47%
- Median Property Price: $124,200
11.) Shreveport, LA
- Traditional Cap Rate: 6.43%
- Traditional Rental Income: $1,475
- Traditional Cash on Cash Return: 6.43%
- Median Property Price: $169,900
12.) Visalia, CA
- Traditional Cap Rate: 6.35%
- Traditional Rental Income: $2,116
- Traditional Cash on Cash Return: 6.35%
- Median Property Price: $266,071
13.) Saginaw, MI
- Traditional Cap Rate: 6.17%
- Traditional Rental Income: $1,110
- Traditional Cash on Cash Return: 6.17%
- Median Property Price: $108,900
14.) Dayton, NY
- Traditional Cap Rate: 6.09%
- Traditional Rental Income: $1.098
- Traditional Cash on Cash Return: 6.09%
- Median Property Price: $121,593
15.) Camden, CA
- Traditional Cap Rate: 5.86%
- Traditional Rental Income: $2,859
- Traditional Cash on Cash Return: 5.86%
- Median Property Price: $1,108,900
Trends with the Best Cities for Cap Rate
- It’s great to notice that all the cities on the list had what are considered to be a good cap rate. All but one city was above the 6% benchmark. Most cities ranged from 6% to 8%. Two cities had a double-digit capitalization rate percentage: Camden, NJ at 10.69% and Dayton, OH at 13.68%
- These cities are the best cities for real estate capitalization rate. However, they are also among the best in terms of affordability. Thirteen of the fifteen cities had median property price below the national average of $300,000. Only one city, Camden, CA, had a median property price of over $500,000 (as is likely expected with Californian cities). To break it down even more, 12 cities had a median property price of below $200,000! To have cities with such high capitalization rate and low property price is definitely a luxury.
- The average traditional rental income of the cities is also very good. Every city had an average rental income of over $1,000. Three cities had a rental income of well over $2,000.
Related: These Are the Best Cities for Investment Properties in the US Right Now
In summary
The high rental income and the low median property price of these cities lead to the high capitalization rate. As a result, investment properties in these cities will most certainly be among the most profitable investments you can make in the US housing market at the moment. To get started on finding profitable investments, start your trial today with Mashvisor!