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GHC Funding

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Alyssa writes about real estate investing, debt-free strategies, and emerging trends in small business finance with a focus on practical insights.

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An excellent question for any aspiring real estate investor is, “What is a good cap rate for an investment property?“ The capitalization rate, or “cap rate,” is one of the most fundamental metrics in commercial and multi-family real estate. It provides a quick, yet powerful, way to compare the value of different income-producing properties, helping you determine if a deal is worth pursuing.

However, a “good” cap rate isn’t a fixed number; it’s a dynamic figure that varies based on market conditions, property type, and your personal investment goals. This guide will demystify the cap rate, explain how to use it, and show you how to find a strong investment property in the Tennessee market. We’ll also highlight how GHC Funding can provide the right financing to help you secure a profitable deal.

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Decoding the Cap Rate: The Core of Your Analysis

The cap rate is a measure of a property’s unleveraged yield. In simple terms, it’s the rate of return you’d get if you paid all cash for the property.

Need capital? GHC Funding offers flexible funding solutions to support your business growth or real estate projects. Discover fast, reliable financing options today!

 

 

The formula for the cap rate is:

Cap Rate=Property Purchase PriceNet Operating Income (NOI)​×100

• Net Operating Income (NOI): This is the property’s total annual income after subtracting all operating expenses. Operating expenses include things like property taxes, insurance, maintenance, and property management fees. Crucially, NOI does not include your mortgage payments (principal and interest).
• Property Purchase Price: This is the price you pay for the property.

The cap rate allows you to directly compare two properties, even if they have different purchase prices and rental incomes. A higher cap rate indicates a higher potential return, but it can also signal higher risk. A lower cap rate often suggests a more stable, lower-risk asset in a high-demand market.

Example:

Property A has an NOI of $30,000 and a purchase price of $500,000.

Cap Rate = ($30,000 / $500,000) x 100 = 6.0%

Property B has an NOI of $25,000 and a purchase price of $400,000.

Cap Rate = ($25,000 / $400,000) x 100 = 6.25%

In this example, Property B offers a slightly better return for its price, all other factors being equal.

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The Tennessee Market: A Landscape of Diverse Opportunities

Tennessee’s diverse and growing economy, fueled by job growth and a business-friendly environment, makes it a prime target for real estate investors. A savvy investor understands that a “good” cap rate in one city may be different from another.

• Nashville: As the state’s cultural and economic hub, Nashville offers a highly competitive market with strong appreciation potential. Here, a “good” cap rate might be in the 4% to 6% range. In neighborhoods like Germantown (zip code 37208) or East Nashville (zip code 37206), you’ll find single-family homes and duplexes in high demand. The city’s thriving music industry, healthcare sector (Vanderbilt University Medical Center), and tourism drive a strong, stable rental market, making lower cap rates acceptable for investors seeking long-term appreciation.
• Memphis: Known for its affordability and high cash-flow potential, Memphis often presents higher cap rates than Nashville. A good cap rate here might be in the 6% to 9% range. In areas like Cordova (zip code 38016) or Whitehaven (zip code 38116), you can acquire single-family rentals or small multi-family properties at a price point that supports excellent cash flow. The city’s logistics and manufacturing industries (FedEx World Hub) provide a consistent tenant pool.
• Knoxville: Located in the scenic eastern part of the state, Knoxville offers a balanced market with both appreciation and cash flow. The presence of the University of Tennessee and the Oak Ridge National Laboratory creates a stable tenant base. In neighborhoods like Bearden (zip code 37919) or near the downtown area, a good cap rate might fall between 5% to 7%. Here, investors can find a mix of older single-family homes and small apartment buildings.

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The Right Financing: GHC Funding’s Key to Higher Cap Rates

A property’s cap rate is not affected by its financing, as the formula uses the purchase price. However, the right loan product can significantly impact your overall return on investment and your ability to acquire a cash-flowing asset. This is where GHC Funding provides a major advantage with our specialized financing solutions.

The DSCR Loan: Tailored for the Savvy Investor

For investors, the DSCR (Debt Service Coverage Ratio) loan is a game-changer. It’s a type of loan where the lender qualifies the property based on its cash flow, not your personal income.

Current Market Insights (as of September 18, 2025):

• Interest Rates: DSCR loan rates typically range from 7.00% to 9.50%. These rates are influenced by the property’s location, the loan-to-value (LTV) ratio, your credit score, and most importantly, the property’s DSCR.
• Requirements:
  • No Personal Income Check: This is the primary benefit. We don’t require tax returns, W-2s, or pay stubs. This allows you to scale your portfolio beyond the limitations of your personal debt-to-income (DTI) ratio.
  • Entity Requirement: The loan is typically made to a business entity (like an LLC), providing essential legal protection.
  • Property Types: We finance single-family homes, multi-family properties (up to 4 units), and even short-term rentals.

At GHC Funding, we understand that investors need speed and flexibility. Our underwriting process is designed to be streamlined and efficient, allowing you to close on a deal quickly. We are the go-to lender for investors because we specialize in a diverse range of financing options, including Bridge Loans for fix-and-flip projects, SBA 7a loans and SBA 504 Loans for owner-occupied commercial properties, and other forms of Alternative Real Estate Financing. Our expertise in the Tennessee market allows us to provide targeted advice and support.

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External Resources for Tennessee Real Estate Investors

For a successful investment journey in Tennessee, it’s essential to have access to reliable local resources:

1. Tennessee Real Estate Commission: The official state body that regulates real estate licensing and practices. Understanding state laws and regulations is fundamental for any investor. https://www.tn.gov/commerce/regboards/trec.html
2. Tennessee Housing Development Agency (THDA): Provides valuable research and reports on housing trends, demographics, and market conditions across the state. This can help you identify areas with strong demand. https://thda.org/
3. Real Estate Investors of Nashville (REIN): Joining a local real estate investment association is an excellent way to network, find off-market deals, and get valuable local insights. REIN is a prominent example for the Nashville area. https://www.reintn.org/
4. Memphis Investors Group (MIG): A well-known and respected REIA in the Memphis area. Attending meetings can connect you with wholesalers and other professionals specializing in the local market. https://www.memphisinvestorsgroup.com/

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Q&A: Your Cap Rate Questions Answered

1. Is a higher cap rate always better?

Not necessarily. A higher cap rate can sometimes indicate a higher-risk property or a neighborhood with lower demand. A property with a lower cap rate may be a more stable asset in a desirable, appreciating neighborhood.

2. How is cap rate different from cash-on-cash return?

The cap rate is the unleveraged return and does not account for financing. The cash-on-cash return measures the return on the actual cash you’ve invested, taking your loan payments into account. Both are vital metrics for a comprehensive analysis.

3. What is a “blended” cap rate?

A blended cap rate is used when a property has a mix of market-rate and below-market-rate units. It accounts for the combined income to give a more realistic view of the property’s overall performance.

4. Can GHC Funding use the property’s projected NOI to underwrite a loan?

Yes. Our DSCR loans are underwritten based on a professional rent appraisal and a calculation of the property’s projected NOI. This allows us to finance properties that are currently vacant but have strong cash flow potential.

5. Does the DSCR loan have a prepayment penalty?

Many DSCR loans come with a prepayment penalty, but the terms can vary. This is a crucial detail to discuss with your GHC Funding loan officer to ensure the loan aligns with your long-term investment strategy.

6. What if I find a property with a low cap rate but high appreciation potential?

This is a common scenario in strong, appreciating markets like Nashville. In this case, your strategy might shift from a pure cash-flow play to a wealth-building play focused on long-term equity growth. You would look for a DSCR loan from GHC Funding with the most favorable terms to maximize your long-term return.

7. Is a DSCR loan a good option for first-time investors?

Yes. GHC Funding’s DSCR loans are an excellent option for first-time investors who have found a solid, cash-flowing property. The streamlined process and focus on the asset make it a far simpler and more accessible path to financing than a traditional bank loan

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Your Path to Profitable Investments

Understanding what is a good cap rate for an investment property is the foundation of a sound real estate investment strategy. With this knowledge and a powerful financial partner, you can confidently acquire properties that meet your investment criteria.

GHC Funding is here to empower your journey. Our specialized loans, flexible underwriting, and deep market expertise make us the ideal partner for investors seeking to build wealth.

Ready to find and fund your next cash-flowing property? Visit GHC Funding at www.ghcfunding.com to learn more about our loan programs or call us directly at 833-572-4327 to speak with an investment expert today.

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