As I mentioned, cap rate is the most accurate — and therefore preferable — way to figure out whether to purchase a rental property. That’s why it’s the method that’s used most frequently by anyone in the real estate business, including appraisers and banks. However, it can be tricky to determine the cap rate for a property that’s already sold because you don’t know what the operating costs are. Unlike with GRM, there’s no ideal range for cap rates. They vary from market to market to the extent that in city A, anything below 6% should be passed on, whereas in city B, a 4% cap rate is something to jump on. Pro Tip: One trick of the trade for getting the best deals on residential rental properties is to purchase them during the offseason. Fewer people buy in the winter, so you’ll have less competition, and sellers might be more willing to negotiate.
COMMERCIAL VERS AL VERSUS RESIDENTIAL PROPERTIES
A general rule of thumb (which can vary by state) is that a building with four units is residential, while a building with five or more units is considered commercial. Each type of property will be subject to different laws and taxes. Regardless of which type of property you use, you’ll still need to consider all the factors above. That said, there are differences to consider when choosing between commercial and residential properties. • Residential properties are usually rented for a year (no more than three), whereas commercial properties tend to have longer leases (up to nine years), meaning less turnover and therefore less risk of vacancy. While profits
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