What Is a Cap Rate? Understanding Returns on Niagara Investment Properties
If you’re shopping for an investment property, you’ll hear the term cap rate a lot. Kevin Murphy explains what it means and why it matters.
What is a cap rate?
The capitalization rate, or cap rate, measures the return on an investment property based on its income. It’s calculated as:
Cap rate = Net operating income ÷ Purchase price
Net operating income is the rent you collect minus operating expenses like taxes, insurance and maintenance (not including your mortgage).
- A higher cap rate means a higher return relative to the price.
- A lower cap rate means you’re paying more for the same income.
What Kevin was seeing in Niagara
Kevin was used to seeing investment properties in Niagara trade at cap rates of 5% to 6% or more. Then, over a few months, he started seeing many sell at around 4%.
That’s a big shift. Kevin bought his own investment property at a 6.25% cap rate. Using his own property as an example, if that cap rate had been 5% instead, the purchase price would have been roughly $20,000 higher for the same income.
What it means when cap rates drop
When cap rates fall, it means investors are willing to pay a premium and accept lower returns to grow their portfolios. That can happen when:
- Demand for rental properties is high
- Investors expect prices to keep rising
- Interest rates or other investments make real estate look attractive by comparison
What it means for you
- If you’re buying: run your numbers carefully. A lower cap rate means less cushion.
- If you’re selling an investment property: a low-cap-rate market can mean strong prices.
Investing in Niagara real estate?
Kevin is an investor himself and can help you analyze whether a property’s numbers make sense.
Call Kevin at 289-768-8382 or contact us.
