Frequently Asked Questions
What is a Cap Rate?
A Cap rate is the return on investment, “The net income a property yields.” Higher rate means more profit.
How do you calculate a cap rate?
To calculate a cap rate you take the yearly income a property is generating (Gross income) and subtract the gross income from the yearly expenses. Once you have the net income, divide net income by price which gives you the properties cap rate.
Example: A subject property is generating $145,000.00 per year from rent plus $5,000 on the laundry room. The taxes is $15,000.00, management $8,000.00, trash $4,000.00, lawn service $3,000.00, insurance $6,000.00, reserves $7,000.00, maintenance $7,000.00 are your yearly cost. The price is $600,000.0
Gross income $150,000.00
Total expenses $50,000.00
Net Income is $100,000.00
Divide price $900,000.00
Cap rate is 11.11%
How will the South Florida Real Estate market perform in 2019
Interest rates are on a continued increase, the new tax plan will take effect, international trade wars, a bumbling stock market, lower unemployment rate, increase in wages, leveling in rental increases, so what is in the horizon for 2019 South Florida real estate market?
Buyers will see there buying power continue to decease due to the continued increase in interest rates. For ever point interest rates increase effects the buyers buying power by 9%-11%. The current Average interest rate on a traditional 30 year fixed is 4.75%. In December of 2017 the avg rate was 3.93% which is an increase of .82% over a one year’s span. We will continue seeing an increase in 2019 and possible at an even more aggressive rate. Commercial interest rates are traditional 1% to 1.5% higher than the traditional single-family home rates with a 15 year term and 5 year adjustments. I would recommend if your adjustment is nearing to renegotiate with your lending institution in efforts of locking in your rate as-long-as possible.
The new tax plan takes effect this year which should flood the public markets with new capital. Large corporations will be infusing money into the market due to the tax breaks creating a bull market. The effect should be grand if your invested in stocks/ bonds and or commodities. Employers will be increasing salaries across the board, thus, creating more capital to offset inflation. As projected, sales will continue to increase in 1 mill + properties. Negative effects of the new tax bill in high tax states like NY and California will incentivize property owners to re locate investment and primary real estate to Florida.
The trade war, “tariff war” will effect the majority of larger cost items in real estate such as AC systems, water heaters, roofs, electrical wiring etc. All of these items have increased in cost from Jan 2018 and will continue to increase through out 2019. Property owners which are not prepared for these major repairs could create an uptick in pre-foreclosures. Warranty/ service plans are available to offset these costly repairs. Some insurance companies offer, “Gap Insurance” which will pay the deductible on a home owners policy in the event of hurricane damage. If you find yourself with limited reserves I would recommend budgeting accordingly and implementing gap insurance along with a warranty/ service plan.
The stock market 4th quarter in 2018 has been its worst in years. Investors are starting to lose confidence in the market place even though the gains since 2016 have been tremendous. As stated earlier, the corporate capital injection in 2019 will be unprecedented, thus, rebounds are soon to come.
Due to the lowest unemployment rate in recent years and Increase wages has consumer confidence high and will continue in 2019. Consumers are spending more on activities, dinning out, travel and home purchases. All though consumer confidence is high we will start seeing lower increases in property values. Inflation and the rise in interest rates will effect buyers ability to purchase homes at last years appreciation rate. Also, new construction has immensely helped with the inventory shortage creating stabilization in pricing.
Rents in investment properties will level this year as pricing is almost at its top. We are still finding under rented properties; however, analyzing a properties true rental potential is paramount for profitability. Even though wages are increasing the cost of living is as well. Proper management is key in staying competitive in todays’ market; furthermore, insuring your investment remains at market pricing for maximum return.
2019 we will see major changes in our local real estate market. This year commercial and housing sectors will start seeing leveling in pricing; however, the sales market will remain strong. We will still have strong demand but inventory will increase due to rising interest rates, inflation and new construction. Investors in publicly traded markets will see rebounds and will bring new money in investment real estate. We will not see 2018 gains in pricing but the market will remain strong; thus, the time on market will increase to procure a buyer.