An investor who decides to purchase a property and hold it for possible rentals is considered to conduct a "buy and hold" purchase. They have conducted research and concluded that this method is most feasible financially.

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Whenever you are considering a "buy and hold" option, it is imperative that you research the current capitalization rate (cap rate) in the area. A capitalization rate determines your overall Return on Investment and/or Net Operation Income. It is also the ratio between an investor's Net Operation Income and purchase price.  An investor should compare the capitalization rate of potential properties prior to purchasing and, always remember that the higher the capitalization rate, the better. 

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CAPITALIZATION RATE CALCULATION

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Capitalization Rate

(NOI / Purchase Price) x (100)

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Net Operating Income (NOI)

(GOI) - (Sum of all Expenses)

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Gross Operating Income (GOI)

(Monthly Rent) x (12 Months)

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Example:

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Purchase Price: $60,000

Monthly Rent: $600

Property Management: $700 per month

Maintenance: $450 per month

Taxes: $600 per month

Insurance: $500 per month

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GOI = $7,200

($600) x 12 Months

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NOI = $4,950

$7,200 - ($600 + $700 + $450 + $600 + $500)

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Cap Rate = 8.25%

($4,950 / $60,000)  x 100