Cap Rate 101: How to Calculate Capitalization Rates in Real Estate

[@alexaillingworth7566]

This was SO HELPFUL!!! Thank you 🙌🏻 connected the dots for me on why certain expenses don’t count towards NOI. Makes so much more sense now 🤩

[@SageRealEstate]

Thanks for watching and supporting our channel.

[@SlickSydney]

Thank you. I ll be selling a 4 plex soon so this helps. A little more to consider in these numbers when the landlord lives in 50% of the building.

[@Walina-gv9ph]

4 plexes are not valued using cap rates.

[@SageRealEstate]

In the situation that the owner occupies two of the units I would use market rents to come up with cap rate. Traditionally four Plexes aren't necessarily traded on a cap rate perspective, but you could utilize it as a way to help you sell and market the property if the rates accept acceptable compared to the market.

[@Walina-gv9ph]

@@SageRealEstate To utilize direct capitalization you need cap rate comps. Show me where you are getting reiable cap rate comps on residential with less than 5 units.

[@SageRealEstate]

Easy...derived from recent closed sales via MLS. It's done all time, you need to research each market.

[@Walina-gv9ph]

@@SageRealEstate LOL Who is calculating the NOI? Just random smucks? But seriously, why wouldnn't you use the more accurate sales comparison valuation method?

[@Walina-gv9ph]

A cap rate is a valuation metric not a return metric. All a 10% cap rate means is that the NOI is selling for $10. A 5% cap rate means that the NOI is selling for $20! How can you not know this?

[@SageRealEstate]

The cap rate is 100% indication of return. If you buy a property cash, the cap rate is your yield/return. Throughout the video I also show how it's used for valuation purposes. Thank you for supporting my channel.

[@Walina-gv9ph]

@@SageRealEstate So which is the higher "return", buying NOI at $10 or $20?

[@SageRealEstate]

When investing one would want a higher cap rate. When selling one would want a lower cap rate.

[@Walina-gv9ph]

@@SageRealEstate Well yeah, but that is because cap rates MEASURE, to the penny what the NOI sold for!!! $8.76% cap rate means that the NOI sold for $11.42. A 5% cap rate means that dollar of possible NOI sold for $20!!! Now if a cap rate measured "return" then why are investors paying $8.58 MORE for the same NOI dollar?

[@SageRealEstate]

You bring up an important point about how capitalization rates (cap rates) reflect the relationship between the NOI (Net Operating Income) and the property’s sale price. It’s true that a lower cap rate indicates that investors are willing to pay more for each dollar of NOI, reflecting a higher property valuation and often lower perceived risk. Conversely, a higher cap rate suggests a lower property valuation and higher perceived risk. To clarify, if an investor buys an apartment building all cash, the cap rate indeed measures the rate of return. For instance, if you purchase a property with a cap rate of 5%, that means your return on investment based on NOI is 5% annually. In this sense, the cap rate does measure the return directly, assuming an all-cash purchase and no debt. Investors often pay more for properties with lower cap rates in markets where they expect strong demand, stability, or future income growth. Essentially, cap rates help investors compare different properties and make informed decisions based on the income-producing potential and perceived risk.