Second properties can be bought to earn secondary income.
They consider it an investment or an income property.
You can decide to rent it out in order to help pay the mortgage.
After it is sold, the goal is mostly to receive a return on the purchase price or higher for many.
Helpful in a myriad of situations, this allows many homeowners an extra source of income.
Every so often simply knowing the difference between your mortgage payments and what you're making each month is not enough, though.
Of course it certainly does not explain when the investment will actually pay off.
What if you do not know how to figure out the return on your investment based on that information, however? That's why you should learn the capitalization equation.
Dividing the entire operating revenue created by an asset of some sort by its capital cost gets you the capitalization rate.
That makes total sense, right? Within that complicated finance jargon, probably not.
Plainly put, a capitalization rate is the ratio between how much it costs to keep your asset running and the initial price you paid for it.
It could be the monthly cost of the mortgage on your investment property (subtracted by any additional costs you are able to receive if you lease it out), divided by what you originally paid for it to begin with, to use a real example.
Once figured out, your capitalization rate will come out as a percentage figure.
The "opportunity cost" of deciding to tie your money up in an investment like this is also a factor investors should consider.
You are potentially losing out on investing your money elsewhere by having and maintaining this property.
It would be best to consider this before you choose to invest.
You will find that the capitalization rate is one very useful tool by which to determine the potential investment income over a period of a specific duration.
By adding in the original property cost, it is customizable and also based on real-world fiscal figures.
For better accuracy, renter income can also be added into the calculation.
Prior to investing your money into a property, you must do your research and consider the possibility of investing it elsewhere, also.