Understanding the cap rate

Understanding the Cap Rate

Likely the single most misunderstood concept in all of real estate investing is the Capitalization Rate. So, what is it really, and how do we use it?

It’s a Formula

Yes, it is a formula: Cap Rate = NOI / Valuation

However, while this is the mathematical formula, if you simply focus on the numbers instead of the perspective, you will miss the forest for the trees.

So, What’s the Perspective

The perspective, simply put, is that the Cap Rate should be used as a measure of the market, and should never be used as a means of determining returns or how much to pay for a property.

Listen to this episode:

Where Can You Find More?

The rest of the epizodes of my new Multifamily Syndication Unscripted podcast can be found here:

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4 Comments

  • Mario Alexandrou Reply

    Hi Ben, listened to your discussion on Cap Rates, if I’m to understand this correctly, it was more to do with multifamily of 5 units and above. Would you be looking at cap rates on 4 units and less with the same light.

    • Ben Reply

      Mario, yes, I underwrite small stuff the same way I underwrite big stuff. The lender doesn’t, but I do 🙂

  • Tiffany Reply

    This was great to hear. I am too curious if there would be any slight differences for SFR properties I would need to consider

    • Ben Reply

      Well, the issue with SFR is that they are not appraised on the basis of income. So, while you may consider the Cap Rate you are getting, the valuation s a function of CMA, having nothing to do with income.

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