Jonathan Cronin explains cap rate as NOI divided by property value. A $1M property with $100K NOI yields a 10% cap rate. The strategy: buy at higher cap rates (10-12%) and refinance or sell at lower ones (8%) to profit from the spread.
Questions this video answers
Over $30 million in assets under management.
10%.
$1,250,000.
Hey, everybody. Today we are going to be talking about cap rates. What they are and how to use them to your advantage, and also why they matter, why they're such a big deal in the. In the apartment buying space and commercial real estate in general. If you've been following us recently, we've been talking about the expanding cap rates in the market due to higher interest rates and. But we're going to talk exactly what cap rates are. My name is Jonathan Cronin, and I represent a group of investors. We have a mastermind for people jumping into apartments. And our team has put down over 30 million in assets under management and apartments and multifamily is our primary focus. So let's jump in because this, this piece of the game right here is one of the most critical for you to understand. So let's let me share my screen and let's dive in. So capitalization rates, what is it? The definition just pulled off Google. It says the capitalization rate is the rate of return on a real estate investment property based on the income that the property is expected to generate. Okay, so that shares it pretty much. If you were to put a certain amount of money into the property, how much can you expect to get back within a year? And not considering debt, so cash. But let's just do an example. So find the cap rate. All right? The value of the property is a million dollars. And your noi, which is your net operating income, it's your profit that you make income minus expenses before debt. Okay, so value is a million dollars noi. Your profit is a hundred thousand dollars. So your cap rate is simply what is a hundred thousand dollars of a million dollars? Divide $100,000 by a million, you get 10%. Okay, so you can fill that in. 10%. All right? Super easy, super simple right there. It's important to understand, the lower the cap rate, the higher the value of the property. Okay? The higher the cap rate, the lower the value of the property. Okay, so that's why we're going back and forth talking about why it's so important in the market. You know, there's a piece that the market plays in the cap rate because of, like I said, you know, it could be inventory issues, it could be in interest rates, it could be all kinds of things. But understanding what the market value of the property is, and then what your cap rate is will determine how the value. So the lower the cap rate, the higher the value of the property. All right, so now we're going to do a little bit different example to give you A better understanding. Same noi, but this time you're going to find the property value. So you're going to be given the NOI and the cap rate, but the property value you got to figure out. So bring out your calculator, the NOI, your net operating income is 100,000. Again, just like the example above. But your cap rate is 8%. Okay. And not 10%. So now what is the property value? Remember I told you the cap rate is the rate of return. So that means your NOI, the $100,000 is 8% of your property value. So what, what do you need to do? You need to take out your calculator and calculate your net operating income, which is $100,000, divided by your cap rate, which is 8%. So a hundred thousand divided by 08. 100,000 is 8% of. I'll type it in here. 1 0.52 or 2 5. $1,250,000. That is your property value. And again, if I were to put it at 10%, it would be lower in value. It would be a million dollars. If I were to put it 6%, it'd be higher. So, so why is this important other than the fact that, you know, your cap rate is determined? You know, your market cap rate is determining, you know, the value of the property, you know, what you can pull out of the property in income is going to determine your, your value based on the cap rate. But why is this important for you? And how do you use this to your advantage? Okay, just off the cuff, not considering the market issues and all this stuff, but when you buy a property, you need to know what the cap rate could be when you sell it or refinance it. Now, like we're seeing in the market, you've got to adjust and expect your cap rate to expand a little bit. You know, you've got to make adjustments for that. Hopefully it, it increases. I mean, we should be appreciating, but when you're buying apartments, you know, you can get in the hole if you're ex. If you're counting. Putting all your eggs in the basket of natural appreciation, okay, which is natural, you know, appreciating the value of the property. The value of the property going up. You know, you want to give some room for a little bit of expansion in the cap rates in case things go haywire. So you can cover your, your, your cost. But when you buy it, you want to think you can talk to mortgage brokers, you know, commercial mortgage brokers, and you can, you can figure out exactly what you should be able to sell within a one year, two year, three year timeline. Of course nothing's going to be guaranteed, but you want to think about what you want to sell it for or refinance it for so that you can be buying it at a higher cap rate. So if I'm, if I'm wanting to increase the value of my property, if I'm wanting to go in and buy a property, fix it up, what could I sell it for or refinance it for? Once it's all fixed up, what cap rate could I be at? You know, if I want to be at a 8% cap rate, you know, when I sell it, I think I could get an 8% cap rate, which is really good, especially if you're talking, I mean, it's totally reasonable if you're talking about a class B or C property. If you're in a lower than that, you may need to be a little higher. But if I want to be selling it or refinancing at 8%, then when I buy it, I probably need to be all in at 10 to 12%. I mean, all in means, you know, all the money I'm putting in, both in, in renovation cost, in everything in my acquisition cost, I want to be all in at a 10 to 12% so I can come down to an 8% when I sell it. So that's kind of an overview of what cap rates are, of what, why it matters to you. And you know, your cap rates are going to also determine, you know, what kind of financing you can get from the bank or what kind of private money you can get, like at what interest rate, because you want to make sure your, your return is of course higher than your, your, your bank, your debt. So anyway, I hope this was valuable for you. It was kind of all over the place. But I think that you get the point in the next week and we're going to be talking about the market cap rate and how, what's happening in the market and how to use that to your advantage and how to where most investors or a lot of investors are in trouble because they didn't expect the contra expansion of the cap rates. You can literally take this time and get ahead and steal. There's still incredible deals to be had. So I hope this helps and I hope you get a lot of value from this. Otherwise, we'll see you next week. All right, have a great day.
