How does appreciation of rental property help

Question

Generally an offer to purchase a rental property is based on the cap rate

= Annual net/ amount invested.

In a situation where property value goes up, how will the end buyer benefit.

Bed.

Hope I am making sense.

Bimal

Ali Boone · Answer

You should never buy based on potential appreciation, unless you are investing solely for appreciation. Consider it a bonus.

Bimal Doshi · Answer

Hi Thanks You All,

You responses helped me a lot. Thanks it answers my question.

Basically a rental unit(s) should not be bought on the appreciatedc value but on the returns in provides on your investement and that the equity in the house can be utilized for purposes Marius pointed out.

Jeff Greenberg · Answer

@Bimal Doshi what you described is cash on cash return, not cap rate. Cap rate is noi(rev-expense not including mortgage)/purchase price.  Closing costs and repairs would not be included.  @Michael Otranto is correct. Usually used in commercial properties.

Michael Otranto · Answer

I think cap rates apply more to multi-family residential and commercial properties.  With single family's you have the sales comparison approach to value.  Multi-fam/commercial your buyers will almost always be investors as opposed to homeowners.  Appreciation is an added benefit although I never "count on it" when making a buying decision.  I always buy based on the current value on not what it may be worth in the future.

Marius G. · Answer

A cash-out refinance is one way rising property values can help, provided that you still cash flow with the larger payments. Similarly you can use equity to cover capital expenditures. Finally you can resell the property later for a profit. Some investors buy poorly managed rentals, stabilize and raise rents, and sell a year later for profit.

Jerry Padilla · Answer

hopefully the property will continue to appreciate in value.