Return on Investment for Properties in South Florida
Gaston Reboredo • December 20, 2019
Calculating the Return of Investment for properties - Capitalization Rate and Value
Several investors are not calculating their return on their real estate investment the right away. We see many overpriced properties being purchased by investors due to lack of analysis. In this blog we are going to explain a simple way of analyzing the return of a real estate investment in its first year of acquisition. Future blogs will explain more sophisticated analysis, such as Internal Rate of Return and Net Present Value.
We are going to use in this example a multifamily building, an apartment building held for rental investment. The same concepts can be applied to any residential or commercial property investment. We are going to be talking about yearly figures.
The first number in our analysis is the Potential Gross Income (PGI) which is the maximum income the property can produce being 100% occupied at market rent. If the building has 10 units and market rent is $1,000 per unit per month, then the PGI for the year is $120,000.00
As we know not all units can be rented all the time. Tenants move out, sometimes we do not collect full rent due to collection situations, etc. Then a vacancy factor must be applied to the PGI to arrive at the Effective Gross Income. This is called the Vacancy Rate and is market derived unless there are specific factors affecting the desirability of the subject property such as physical obsolescence but in normal circumstances the vacancy rate is inherent to specific market conditions and can be market derived.
Once we arrive at the Effective Gross Income we need to deduct all Operating Expenses, such as Property Taxes, Maintenance and Repairs, Management Fees, Property Insurance, Licenses, Utilities (is paid by Landlord), Grounds and Landscaping, Leasing Commissions (amortized) and any other cost or expense related to the operation of the property and necessary for the property operation.
When we deduct the Operating Expenses from the Effective gross Income we arrive at the Net Operating Income. But not quite, because we have not deducted Capital Expenses, the amount of money we have to spend over time for roof replacement, equipment replacement (Air Conditioning and Appliances) Parking Lot resurfacing, Painting, and any other expenses necessary to keep the property going over time. These Capital Expenses are not spent yearly but when necessary and must be estimated and forecasted and accounted for and amortized over the life of the asset being replaced or improved. These are known as Reserves for Replacements, money we put aside every year from the operating income in order to have sufficient funds when the replacement takes place. For example if I know an Air Conditioning is 10 years old and its useful expected life is 15 years, i need to take into account that in 5 years most likely i will have to replace the unit. If the cost of a new unit is $5,000 then i need to put aside $1,000 as Reserves for Replacement yearly if I am buying the property today in order to have enough funds for the replacement of the unit in 5 years. To be technically correct we need to apply the expected inflation rate over that period because the cost of the unit is $5,000 today but due to inflation most likely the unit will cost probably $5,500 in 5 years when we apply an estimated inflation rate. It is a good practice to actually separate these funds not only accounting for them but actually going into a money market account, savings account or government bonds and rolls over year to year until used, if the unit is expected to be replaced in 5 years but lasts 7, then I will have in year 7 more than enough funds to replace the unit so I can either adjust my yearly reserves for replacements, distribute the excess to Partners or keep the additional funds as a cushion. It is very important to spend sometime in this concept and properly account for all variables and obtain the best possible estimates.
Then from the Effective Gross income we need to deduct the Operating Expenses and Reserves for Replacement or estimated Capital Expenditures to arrive at the right Net Operating Income.
If we divide the Net Operating Income by the Total Acquisition Cost (Purchase price plus Closing costs) we obtain a return for that year of operation which is called Capitalization Rate or Cap Rate. The Cap rate is a good indication of an expected return of the property. Also the Cap Rate can be market derived by calculating actual sale prices and income and expense figures on recently closed similar properties. The Market Derived Cap Rate can be used to determine the market value of a given property and compare it with the asking price. If we have a target Cap Rate we can then determine the offer we want to make to purchase a property, knowing all other variables.
You can see that up to this point we have done the analysis before tax and before financing. Usually we perform analysis before and after tax but we will discuss in another blog. Financing has nothing to do with property value at this point and we will analyze the effects and pros and cons of financing a real estate investment.
For now the concept of Cap Rate reflecting the return of the investment and being a way to arrive at a property value, calculating Net Operating Income and then Cap Rate can help investors pay no more than market value for properties and compare available properties and their offering prices with their return on investment goals.
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From the Law Offices of Heist, Weisse & Wolk, PLLC
Think again !!
Welcome to this month’s Investor Newsletter. With market conditions varying widely from one metro to the next, staying informed has never been more important. This edition dives into the shift away from a one-size-fits-all housing market, highlights the hidden value of assumable mortgages, and covers the SFR headlines worth watching this month. Let’s dive in! The Death of the “National Housing Market”: Why Local Knowledge Is the New Investor Edge For years, real estate investors could rely on a familiar narrative: the housing market is hot or the market is cooling. But in 2026, that headline is becoming less and less applicable as there is no longer just one housing market. Instead, there are thousands of local markets moving at different speeds. At the national level, housing appears more balanced than it has in years. According to Realtor.com’s Housing Market Report , April contract signings rose 4.5% year over year, while new listings reached their highest level since 2022. On paper, that suggests momentum is returning, but beneath the surface, the story can change by region, metro, and even ZIP code. Realtor.com found that performance across the top 50 U.S. metros varies widely, buyer activity is picking up in some areas, while others remain slow. In fact, many of the strongest-performing housing markets in early 2026 have been concentrated in the Midwest rather than the typically strongest Sun Belt region. A recent Fortune analysis noted that affordability and home pricing are helping Midwest markets outperform many southern metros in which are now facing softer demand and rising inventory. Rental performance is becoming just as localized too. The latest SFR Index found rent growth slowing significantly compared to prior years, with standalone SFR rents increasing just 0.8% year over year nationally in February. Meanwhile, some markets continue to stabilize while others face more pressure from new supply and affordability challenges. Additionally, according to a Yardi Matrix report , areas with more new construction, particularly in parts of the Sun Belt, are seeing weaker rent growth. Local market changes often show up first in property management data. Leasing activity, renewal rates, concessions, and tenant demand tend to change at the neighborhood level long before national housing reports reflect them. One area may remain highly competitive while a nearby neighborhood sees slower leasing activity. As an investor, it may be time to look beyond national headlines and even citywide trends when evaluating markets. You may want to look at where homes are leasing fastest and which neighborhoods are seeing new supply. Competitive edge may not come from choosing the right city, but from understanding the right block. As your property management company, we are here to help, so please reach out if you have any questions about your market. Did You Know: Assumable Mortgages Everything You Need to Know in 60 Seconds! What exactly is an assumable mortgage? Instead of getting a brand-new loan, the buyer takes over (or “assumes”) the seller’s existing mortgage, including the current interest rate, remaining balance, and loan terms. Not all loans qualify, but many FHA, VA, and USDA loans do, while most conventional loans do not. Who can use this? Real estate investors, homebuyers, and sellers can all benefit. For investors, assumable loans can be attractive when today’s interest rates are much higher than the seller’s existing loan rate. On the other side, it can also be used as a major selling point. Where can investors find this? Assumable mortgages can be found nationwide, but availability depends on the financing already attached to the property. Most conventional bank loans have a "due-on-sale" clause, which means they cannot be assumed. When is the best time to use this? These loans become especially valuable when current mortgage rates are much higher than rates from previous years. Assuming a mortgage at 3% instead of getting a new loan at 7% could dramatically reduce monthly payments for investors. Why does this matter? As a buyer, an assumable mortgage can help improve cash flow, lower financing costs, and make a property more attractive to future buyers. As a seller, it acts as a massive marketing tool. Offering a built-in low interest rate allows your property to stand out. Investor Takeaway: A low-rate assumable mortgage can be a valuable opportunity when buying AND a strong selling feature when it’s time to exit an investment. SFR Trending Headlines Stay Up to Date on the Hottest SFR News & Stories Are Single-Family Rentals Climbing While Apartments Slump? The Summer Pause : Why Zillow Says the Housing Recovery Just Hit a Wall Lizzo Offloads Her Beverly Hills Compound at a Massive $4M Discount Wall Street Is Betting $15 Billion on a Brand-New Wave of Housing Supply Why Ellen DeGeneres Just Listed Her $30M Eco-Farmhouse and Left for the UK Rate Update: We've Partnered with LendingOne to Bring You The Best DSCR Rates & Terms! DSCR Loan Advantages: Rates Often Lower Than Banks No Personal Income Requirement No Tax Returns Needed Not Reported on Credit Faster Closing Times Specialized Loans for Investors Only! To Inquire about Single Family Investor loans by email us at office@properties.rent Until Next Month! The Florida Property Management Services Team
