Calculating cap rate on current investment props?

Question

Wanting to know how my rental properties purchased years ago are doing considering today's market. Do I calculate this the same way as buying now, with a cap rate -- even though I have all the actual numbers?

John Warren · Answer

@Erin O'Connor Smith I figure out how much equity I have (I may have to pull comps, etc), and then I simply divide annual cash flow by equity. It is the same calculation you would run to get a COC return, except you didn't necessarily put all of the equity into the deal. The reason I like to focus on return on equity is that my equity has grown dramatically in some of my properties, and one property I purchased here locally in Berwyn has nearly doubled my equity in three years! My COC may be fine, but it may eventually make sense to redeploy the equity somewhere else.

Erin O'Connor Smith · Answer

Hi @John Warren, thanks for that! Wondering how you approach calculating a return on equity? I have my annual P&Ls from each property, which of course don't take into account the tax deductions... Your thoughts please!

Erin

John Warren · Answer

@Erin O'Connor you can definitely figure out the cap rate on your property! I think that is a great way to compare your property to other investment opportunities. You also may consider running a return on equity calculation every so often. If your return on equity gets too low (even if the building is great), you would want to at least consider selling. There comes a point in every investment's life cycle where it becomes more advantageous for you as the investor to trade up.