Ep 38 - Cap Rates & How To Calculate Them

Hey, everybody. Flip and Danny here, founders of the Freedom Real Estate Group family of companies, and welcome to another episode of our.

Podcast called Freedom through Passive Income.

That's right. And today's episode is called Cap Rates and How to Calculate Them.

That's right. And this is really your gig.

Yeah.

You know, I talk a lot of some of these videos, but this is your world.

Back in the day. Take over. Yeah. When I was doing all the acquisitions, I was really handling all this.

Yes.

So cap rates and how to calculate them. So you take your noi, which stands for debt operating income. You divide that by your current market value, and that equals your cap rate. So we like to keep these episodes short and sweet.

Stop it. Can you give us an example, Mr. Flip?

So, like a 7 to 8 cap or 77 cap rate. Cap means $100,000. Property would be generating 7,000 or $8,000 a year, depending on the cap rate. So if it was a 7 cap, you would be getting. Or say you made $7,000 on your $100,000.

Yeah.

So you divide the 7,000. You divide that by the 100,000. That equals 7, which. So that means it's a 7 cap.

Yes.

So that's. That's how you figure out cap rate. It's real simple. But now is where all the fun stuff comes in. But before the fun stuff, if you're watching on Facebook, LinkedIn, YouTuber, MySpace, TikTok, Instagram, hey, MySpace is still around, man.

Is it really?

My pages. But now is your time to Hulk smash that love button. You see, we've got our little Reese's Love candy already. It's not. It's the middle of January love candy because Betty's awesome. That's right. So make sure you hit that, like, button. The love button.

Anyway, so going on helps our YouTube algorithm, all the social media platforms. That's why we're asking you to do it, because it really kind of boosts it, helps us share it, et cetera. So thank you in advance.

That, and I stay awake at night going.

I'm just kidding. It's actually me like, oh, they didn't like that video. Anyways, what I wanted to jump in is to talk about what he just shared with you. That's very much how our turnkey properties go. Right? We're going to give you a cap rate because we. We've already done the entire rehab. We know what it's going to sell at because we have looked at the comps in the area and we have said, hey, other comps in this area with this type of property. And this type of rehab is selling at this. So we're going to sell it at this price as well. And then we figure out, okay, what are the expenses, what are the taxes? And we figure out what the net operating income anticipated should be. We take that divided by the purchase price that we tell you that you're going to purchase it for, and we give you that estimated cap rate, right? So that's an after rehab, like after it's stabilized. After, after, after. The reason I'm bringing this up is because when people talk about cap, they don't always talk to you about two different kinds of cap rates. And that depending on who you are and what you're listening to us for, it could be because you just want to use us and you don't want to understand everything that we understand. It could be because you're just learning from us and what we're doing so that you can eventually do it on your own or at least understand it to a greater level. So that when we're talking about things, you're like, yep, I get that you talked about that in the video. So if you're somebody that's like that, that you're trying to understand. I wanted to talk to you about a going in cap rate. So when you are buying a turnkey property, that's the stabilized cap rate after a rehab, after repair value exit cap rate, that's that the going in cap rate is when you're buying a multifamily property, this is when you're going to talk about it the most. Buying a multifamily property and it's in as is condition. It's like the 56 units that we bought. And you're looking at it, you're evaluating all the expenses that you're going to have to do, right? You're going to look at and let's just say I was buying it from you. Flip for this example, I'm going to ask you for your T12. We talked about that before. T12 is a trailing twelve months of expenses. I want to see what type of income you've received, what type of expenses and maintenance and all of those numbers. And that's what. That's where I'm going to start figuring out my going in cap rate, right, Is I'm going to use his numbers to understand what type of money he's going to make. That's not going to be the money I make because I'm going to rehab it and I'm going to raise the rents. I'M going to add some utility packing and just I'm going to add some pet rents. I'm going to force appreciate this property. But based on his numbers, I'm going to talk to a broker in that local area and say what's the going in cap rate of properties that are value add deals so that I can understand them. We just did this very recently and this particular broker said, hey, in this area pre Covid it was six, seven. Right now I would say six and a half. You could probably even go five and a half, maybe even five. I was just, I just. One of my clients bought a property that was here and is very close by and he got it in it as a four and a half going in cap rate for that as is type property. So it's a totally different number. So again, not a lot of people talk about that because it can get confusing and we're not here to confuse you. But depending on who you are and why you're watching us, I thought it was important to help you understand there are two types of cap rates. You're stabilized after repair value and then you're going in cap rates. I'm done.

The biggest thing too is every market's different. I mean right now we're in Dayton and we go down to. Down into Cincinnati, but we go through Franklin, we go through Miamisburg, we go through Middletown. So and just every market from here down down to Cincinnati and including Cincinnati are all different markets.

Yes.

So the price of our property in Middletown is not going to be the same cap rate as property Cincinnati or north, North Dayton. You know, so it's. Every market is different. So make sure you're talking to somebody that you know like and trust, which is on one of our other videos. So but make sure you get get with somebody that knows what they're doing and has experience in that area.

Yes. That's 100% truth. Rely on a good team.

That's right. But again, we do like to keep these short and sweet.

Yes, we do.

We'll end now.

Okay.

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Bye.

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