If you work with a turnkey real estate investment company or are thinking about it, your involvement may be working as a financial partner or buying the property outright from the firm for monthly cash flow and long term appreciation.

If you’re buying and holding on your own, your initial profit comes incap rate calc the form of your rental payments. When evaluating a potential investment from a turnkey operation, one of the things you’re looking at is how much you will net after all expenses are deducted compared to how much you paid for the property. You’re looking at the cap rate.

The capitalization rate, or cap rate, is a number that can tell you at first glance whether or not the property is worthy of your attention. The cap rate isn’t the only factor to consider, but it’s a good starting point. The cap rate is simply the ratio of the net annual income and the purchase price. Higher cap rates mean more income compared to lower cap rates. It’s not hard to calculate but if you’re new to real estate investing here’s how to calculate the cap rate on your own.

Add the entire annual rental income generated from the property. Next subtract operating expenses such as maintenance costs, property taxes and insurance. If you have a property manager include that fee as well. Don’t however include the mortgage payment or closing costs on a new loan for the rental. The result is net income.

Next, divide the net income by the purchase price. Say that a duplex you are considering brings in $1,500 per unit, or $3,000 per month. That’s $36,000 per year. Now add up anticipated expenses such as lawn maintenance of $500 per year, $2,000 per year in taxes and $800 for insurance for a total of $3,300. The duplex costs $250,000.

Divide $36,000 (income) by $250,000 (purchase price) to get a cap rate of 0.144, or 14.4%. That’s a solid return. Now say a similar duplex at $230,000 nets $30,000 annually. The cap rate is $30,000 divided by $230,000, or 13.0%. The first property is the better deal because the cap rate is higher. This property deserves further exploration.