real estate investment rental cap rates

Cap Rate Killers – Real Estate Investing

Many investors are well-equipped to calculate the performance of their properties by the use of a cap rate analysis. That is to say that they will utilize a metric which will determine the value of an investment based on the annual return on investment. However, in our local Real Estate markets there are several hidden monthly costs that can be very effective at dramatically lowering that return while not being overwhelmingly obvious to an investor new in the local marketplace.

The first would be HOA fees. HOA’s in most cases can be a very large problem when using a house for a rental. Not only can they place restrictions on what you do with the property that can limit your profitability but they can also impose fines against hte property and owner itself for the actions of a tenant. In addition to this it can be difficult to judge the performance of a property in an HOA simply because an HOA is not necessarily regulated to a certain increase or increases over any period of time like maximum property tax hikes or other regulated expenses. If an HOA finds itself vastly underfunded or has failed to keep a steady reserve account then one major repair such as roads, roofs, etc. etc. could cause huge increases to an HOA payment.

Another cap rate killer is increased insurance costs. Sometimes extraordinary insurance costs can derive from a multitude of claims in the past h, however, the more common culprit for this lurking beast stems from environmental hazards. If a property is determined to be in high fire or flood designations then teh insurance company can charge up to $200.00/mo in additional insurances simply to protect against these natural disasters that they deem the property to be in greater danger of.

The last and possibly most important cap rate killer is mello roos or otherwise known as special assessments. When a new rental property or tract of properties is constructed it will in many times be given a CFD assessment, or otherwise known as a “Special Assessment Bond”. These bonds can vary in the local area between $2,000 and $7,000 a year. These will appear on the property tax bill and will be IN ADDITION to the normal taxes. While the builders or sellers may try to downplay the sale of their $600,000 asset’s share of this by claiming things such as “But it only has a 1% special assessment” a keen investor will realize that this 1% over 45 years is actually an additional $6,000 or $500/mo obligation.

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