Do you know how to quickly evaluate a potential investment? CAP Rate helps you understand how much return the potential investment will earn, and give you a hint about whether or not it’s a “good” investment.
1:06 – What is CAP Rate? Capitalization Rate is a way to evaluate investments. The higher the CAP rate, the better the investment.
1:45 – You need Net Operating Income (NOI) and Purchase Price to calculate the CAP rate.
2:10 – Net Operating Income (NOI) is calculated by adding up all your revenues and subtracting expenses. For example: revenues of $30,000 / yr – expenses of $10,00 = NOI of $20,000.
3:15 – Divide the NOI by Purchase Price to get the Capitalization Ratio or CAP Rate. For example: NOI $20,000 / $500,000 Purchase Price = 4% CAP Rate.
3:46 – Is 4% good or bad? It depends on your investment objectives. CAP rate is biased toward income properties (as opposed to appreciation properties). Make sure you do you due diligence to figure out more accurate income and expenses. Use the CAP rate as one of your investment evaluation data points — it doesn’t tell the whole story.
5:42 – CAP Rate Inversion is taking a known CAP rate and calculating a purchase price for a desired CAP rate. Offering less for the same income will increase the CAP rate. For example: NOI / Desired CAP rate. For example, $20,000 / 5% (instead of 4%), gives us an adjusted purchase price of $400,000. Areas have a normalized CAP rate. If CAP rates in the area are around 4%, for example, and you spot an investment around 3%, offer a 4% CAP Rate.
6:57 – What’d we learn today?
8:32 – Bloopers
* No investors were harmed were harmed in the filming on this real estate discussion.
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A Production with Security Home Mortgage’s Jason Christiansen, and Hive Collective at Presidio’s Tyler Cazier and “Mr. Suit” Aric Wiszt.