Sarah SullivanFounder and CEO of SuGo Capital

How to Build Wealth: Understanding Cap Rates in Real Estate Investing

Name: How to Build Wealth: Understanding Cap Rates in Real Estate Investing
Uploaded: 2024-06-03T23:43:22+00:00
Duration: 59 s
Channel: Sarah Sullivan
Description: Cap rate is the return investors expect from a property type, calculated by dividing net operating income by the cap rate. When cap rates fall from 5.5%…

3 Jun 2024 · 1 min

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Cap rate is the return investors expect from a property type, calculated by dividing net operating income by the cap rate. When cap rates fall from 5.5% to 4%, a property worth $18M with $1M income suddenly becomes worth $25M, even though nothing about the building changed.

Questions this video answers

5.5% ("five and a half percent")

4.5% to 4.8%

$1,000,000

$18,000,000 (1,000,000 / 0.055)

Chapters

Get really excited when I talk about cap rates. Sean, can you explain what is a cap rate? What a cap rate is, is basically it's a market determined rate of return that is appropriate for an asset class. If you're investing right now in a risk free 10 year treasury, you may be getting a 4.5 or 4.8% rate. If you put it in a money market, you may get 5%. Right. Right now, cap rates in multifamily are 5 and a half percent. So you take your NOI, your net operating income, and you divide it by 0.055. And that's generally the price that the asset costs. So if you got a low cap rate and you same exact numerator, let's say it's a million dollars, you divide it by 0.055. Let's just do that math. That asset is worth $18 million at a five and a half cap. Okay, let's say that same stream of income, you do nothing to the property. We buy it today, we operate it exactly as the prior owner operated it, and we go to sell it in three years again, it's $1 million, no change in NOI. But the cap rate is now 0.04. That, that $18 million asset is now worth $25 million.