Donna Genie walks through the cap rate formula: net operating income divided by sales price. A campground with $100,000 NOI and $1,000,000 price has a 10% cap rate. Market rates typically run 8.5 to 11.5%, and campgrounds often outperform passive rentals, though cap rate is just one valuation tool.
Is an 8 for a cap rate good? Well, there's a lot of confusion over what cap rate is and how do I know if that's good or bad? Is it better to be higher or to be lower? Let's solve the mysteries of cap rates. Today, cap rates are used a lot in the campground world, and real estate, for that matter. They talk about how much money you'll get in return for your investment. So it's a calculation of a return on investment type function, but in a little different way. First, let's define what a cap rate is. A cap rate is taking the net operating income that's provided by the property for a year and dividing it by its sales price. That is going to give you a percentage. So let's cut some Easy math here. $100,000 in net operating income. So that means taking the income of the campground, list all of the expenses. What would the take home be for the owner? So let's assume that's $100,000 and that park is for sale for $1 million. All right, so let's go back to our formula. Take $100,000 divided by $1 million and that is 0.1 or a 10% cap rate. A 10. So 10 is good, really good. It used to be our Marketplace, we saw 8.5 to about 11, 11 and a half maybe. Were the norms. With interest rates as high as they are today, you're going to find those cap rates coming down. Down is worse, up is better. Now, for example, though, in a real estate market, a 6%, 7%, 8% are pretty darn good. Campgrounds provide a higher. Most of the cases we are deducting out expenses for the campground owner's personal residence. So they generally give a higher rate. And they're also more profitable than a typical rental property, too. You've got basically an operating business versus a passive activity. So they should generate more income. So when looking at cap rates, you're going to look at that terminology to determine either buys or sells and use it as a measuring tool. Now, is a cap rate the end all be all? To some people, maybe, but it shouldn't be. There are a lot of other factors that go into that consideration, but based on opportunities, potential, what's going on in the campground, because as a new campground owner, you're going to come in and change what's happening. Most likely. Usually you've got a whole different spin on what's going on, and you're not just walking in and assuming you're going to keep that same exact business model forever. So take a look at your cap rates. I hope this helps you understand a little better. One last time for review. A cap rate is the net operating income divided by the sales price. Hope that makes life easier for you.
