How to Analyze Real Estate Rental Properties: Capitalization Rate Explained

When you're analyzing a real estate deal for a rental property, one of the most common metrics you'll hear about is cap rate or capitalization rate.
Whether you're an investor, a realtor, an appraiser, or a broker, learning about cap rates is critically important because it's a common benchmark that someone else can use against you if you don't know it.
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0:00 - Intro
0:19 - Why is Cap Rate important?
0:41 - Overview
1:00 - What is Cap Rate?
1:52 - Calculating NOI (Net Operating Income)
4:53 - Formula for Finding Cap Rate
6:39 - Finding the Property Value Using Cap Rate
7:04 - When to Calculate the Cap Rate
8:03 - What is a Good Cap Rate?
10:33 - How Cap Rate Affects the Property Value
12:25 - Rental Property Calculator
12:48 - How Increasing Rents Affects Value
15:42 - Limitations of Using Cap Rate
17:08 - Final Takeaways
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Juan is a Licensed California Real Estate Broker that has acquired his Certified Commercial Investment Member (CCIM) designation and a Real Estate Investor who is dedicated to helping people build wealth and financial independence through real estate investing.
Juan specializes in selling multifamily apartment units as well as residential properties. He prides himself in locating value-added properties that maximize the client’s investment yields. Juan is a detail-oriented entrepreneur.
Today he handles everything from finding, funding, designing, managing, and selling investment properties. His diverse experience in commercial and multifamily real estate allows him to develop and navigate a wide range of projects.
BRE 01417642​​​
www.SageREGroup.com
Follow me on social media:
Instagram: / multifamilylongbeach
Facebook: / sageregroup
LinkedIn: / juanhuizar-sagerealestate

[@MarkD11]

WOW!!! As an uninformed investor, I doubted how well off I was. This cleared everything up and now I feel empowered to continue investing. I can't thank you enough for this video.🎉

[@SageRealEstate]

Glad it was helpful!

[@akobim3977]

Very good. Clear explanations. I thank you

[@jmilly715]

Wonderful explanation! Not just calculations but concepts!

[@SageRealEstate]

Glad you enjoyed the video. Let me know if I can explain another real estate calculation.

[@theplinkerslodge6361]

Long term you're going to want to measure in inflation. Plan for block expenses - save for replacement of major items like repaving, boiler, roof, painting, etc.

[@BUILDYBUNCH]

Thanks a lot for breaking down the CAP RATE and NOI - your explanation made it so much easier to grasp. Appreciate the clarity!

[@SageRealEstate]

You're very welcome!

[@qaiserqureshi4024]

Great - It's not only the formula but its concept and limitation are presented outstandingly. Appreciate and thanks for making this wonderful educational video. Regards

[@SageRealEstate]

Glad you liked it! Thanks for commenting.

[@user-ct8ee8od6o]

Thanks for this video. Very informative

[@shouldigetit]

Great explanation, thank you!

[@rickmayorga5316]

The best video I’ve come across! Thank you!

[@SageRealEstate]

Thanks Rick !!

[@jfevrier9593]

Agree

[@bryan35801]

Excellent video, enjoyed the easy explanations and TRIMUP

[@SageRealEstate]

Glad you enjoyed it! Thanks for commenting !

[@LuisVargas-ji6yk]

Good explanation, thank you!

[@SageRealEstate]

Thank you, Luis make sure to like, comment and subscribe. Your feedback let us know the type of content to create.

[@kennethmartin7138]

Great video!! Thanks 💯

[@SageRealEstate]

Glad you liked it!

[@julianbernilla1177]

It is excellent information !! GOD Bless you🙏🙏🙏🙏

[@SageRealEstate]

So nice of you

[@jessicahou8340]

Thanks for sharing this knowledge ❤❤❤

[@SageRealEstate]

So nice of you

[@rlew8095]

Great video! Thank you!

[@SageRealEstate]

Thanks 🙏

[@dianechapman6987]

Thx for using the white board to explain things, much appreciated!👍

[@SageRealEstate]

Thanks Diane. We plan to use the whiteboard more. Comments like this reassure us.

[@RaceForGoodLife]

great info my friend! thank you

[@SageRealEstate]

Glad it was helpful!

[@alejandrosantos1879]

Great video man

[@patomlinson4865]

Great. Teacher Or mentor Is a man who can touch your mind nice details scenario.

[@SageRealEstate]

Yes, you are right

[@edithwaithira9967]

Thank you for making it easy to understand!

[@SageRealEstate]

Thanks Edith

[@ladybug19348]

Wow your video is the best on the Internet. I have zero experience in real estate but I am looking to learn more about it. So far I can follow everything you are explaining. Thank you for sharing your knowledge.

[@mauriciocruz5271]

Great info , I am subscribed. Will look up your office

[@SageRealEstate]

Welcome aboard!

[@SajidArt1]

beautiful explanation .......grt

[@SageRealEstate]

Thanks for liking

[@lonniewatson7779]

Does the same formula apply when wholesaling apartments?

[@paulbiniasz2278]

Great Job!

[@SageRealEstate]

Thank you! Cheers!

[@llambproduxions]

Would it make sense to Capex a solar panel installation for an apartment complex and resell the electricity to each tenant?

[@AJF66OG]

Higher cap rates are usually considered a riskier investment and a little lower is more stable.

[@SageRealEstate]

Correct riskier investments will typically have a higher cap rate.

[@roadto5million248]

Excellent video as always. When I choose to invest in California I'll certainly be contacting you!

[@SageRealEstate]

You got it !

[@user-sz3od4kh7w]

Great video, simple explanation, unlike some investors who click bait people. Thanks and keep up the great work!

[@SageRealEstate]

Appreciate it!

[@lindor-1luv402]

Greaty explained!

[@SageRealEstate]

Glad it was helpful!

[@adrian.o4495]

Your videos deserve a lot more views I think they will grow in the near future

[@diane8784]

I think so too! This video clearly explains cap rate and NOI for me, thank you👍

[@Markell2]

Valuable content can't wait to buy my first property!

[@SageRealEstate]

Thank you

[@user-vb8vt1br2o]

Your awesome Thank you

[@SageRealEstate]

You are so welcome

[@simangafoster4504]

I think it is also wise to compare your Net operating income with other comparable properties in the locality, reason being: many factors can influence a higher net operating income like the age of your property, systems (Heating & ventilation systems), and property management. Thank you for the lesson 🙏🏿🙏🏿🙏🏿

[@SageRealEstate]

You are correct. ✅

[@CoachMeMLD]

What's the formula for figuring out cap rate for a neighborhood? Do we add the most recent sales and then do we compare it to the purchase price of the new house?

[@SageRealEstate]

Net operating income divided by sales price.

[@tracychen36]

If i invest in a daycare center and be the NNN landlord only and not participant i the daycare operation. The NOI here is the NOI of the daycare business or the landlord’s NOI (I.e. pretty much just rent amount) ?

[@SageRealEstate]

That is correct. NNN means the tenants pays all the operational cost so it will not need to be subtracted from the annual gross rent.

[@marcohoudini]

This is gold

[@SageRealEstate]

Thank you 🙏

[@user-kl7cp6gh9s]

Is it bad idea to buy 1bed1bath 4unit? Please advice. Thanks :)

[@SageRealEstate]

I don't believe it's a bad idea. Nothing wrong with all one-bedrooms or all studios in a four Plex.

[@Ace-ht1is]

Thank you for the explanation but it sounds quite unrealistic in Southern California. Because properties are overpriced out there. It's almost impossible.

[@user-zt9dl1fk1i]

Love the video content! Great job explaining the material, which made it easy to grasp and understand. I am a newbie to real estate investing, I haven't acquired any investment properties at the time in my real estate career, but I am very excited and know that my success is inevitable, reason being is that I really love real estate and most of all I love numbers. I feel that I have awakened my purpose in life. God Bless!

[@SageRealEstate]

Awesome, thank you!

[@Everybodywantsyourmoney]

I have a duplex for sale

[@fernandobelmont5831]

I have a question, when you increase rents the expenses increase too? I thought they stayed the same. If anyone can explain that would be great thank you

[@SageRealEstate]

If you increase rents, the expenses will remain the same. Yes.

[@Walina-gv9ph]

How are you comparing properties on the market?

[@SageRealEstate]

We are looking at both closed sales and active sales to get an accurate view of where cap rates are at.

[@Walina-gv9ph]

@@SageRealEstate So if you are in an 8 cap market then ALL comparable properties are at about an 8 cap. Again, what are you comparing, an 8 cap to an 8 cap? LOL

[@user-bo8zq8gv4z]

How do you find the cap rate for a market?

[@SageRealEstate]

To find the market cap. You would need to find similar properties around the property you're considering and calculate what the cap rate is in that area from those closed sales. Or ask someone who is a real estate broker and understands cap rates.

[@rafaeldominguez5372]

What are the other 5 metrics.?

[@Joe124100]

Great video. I generally have been dealing with commercial buildings strip centers with 6-8 stores. Thank you.

[@SageRealEstate]

Congratulations on your success. What's the going cap rate for those types of strip centers that you invest in?

[@Joe124100]

The Cap Rates run 7.09 and 8.80 in the two different areas.@@SageRealEstate

[@ramsrini-nb8yf]

Hard to find anything over 5% cap rates for 2 or 3 family homes near big cities these days. Prices still too high and rent recession is due to happen as employment is at peak in 2023

[@SageRealEstate]

Prices are still high nationally. Try focusing less on the cap rate and compare the income versus the mortgage. Smaller apartment buildings typically don't give off a high cap rate.

[@gabriellecarmen9869]

Great video. How does the mortgage cost fit into valuation and cap rate? You specifically leave it out for NOI..

[@Walina-gv9ph]

Debt service is on an operating expense. Cap rates are used to value NOI. NOI is income less operating expenses.

[@Walina-gv9ph]

There are no cap rate comps for 4plexes. They are valued by the more accurate sales comparison method.

[@SageRealEstate]

There is always a cap rate. It could easily be determined as you know the sales price and the operating income.

[@Walina-gv9ph]

@@SageRealEstate There is no reliable source for cap rate comps on properties less than 5 units. Without comps you can't use direct capitalization. But the question is why would you want to use an inferior valuation metric?

[@TwinPalmsOn30A]

For the same reason mortgage isn’t included in operational expenses, management fees shouldn’t either

[@Malliomadeit]

💪🏽💪🏽💰🔥🔥

[@diane8784]

I'll be investing in Michigan initially & then out of state investing eventually... Multifamily.

[@SageRealEstate]

Excellent

[@tiggerpup_nz]

“There’s no reason why you’d purchase at a cap rate lower than market” well not necessarily. Perhaps that property is under rented. Perhaps that property has lower risk.

[@SageRealEstate]

Correct. Cap rate is really only one way to measure performance, and there's always additional factors in determining a good deal.

[@Rose-re9tn]

The operating expenses typically include things like property taxes, insurance, maintenance and repairs, utilities, and any other expenses related to the operation and maintenance of the property. These expenses do not include mortgage payments or other financing costs, as those are considered separate from the property's operating income and expenses. While payroll or salaries for any employees are an expense associated with the operation of the property, they are usually not included in the calculation of NOI. However, if the property has an on-site manager or staff whose salaries are directly related to the operation of the property, those expenses may be included in the calculation of operating expenses for the property.

[@fatjonseatingadventures5429]

You spelt management incorrect

[@SageRealEstate]

😂

[@ranbirgill4718]

This is so elementary why not teach us to add

[@SageRealEstate]

Thank you for watching. This is one of our most popular videos might be simple to you but to many folks this is the first time they've seen it.

[@mrshawwholesalecom7226]

🤓cool

[@SageRealEstate]

Glad you enjoyed our video!

[@josemendez498]

I recently encountered a multihome apartment building of 15 units do you have an email or phone number that i can reach out to you and look over the details of this deal

[@SageRealEstate]

Hello Jose, Visit my website www.sageregroup.com All my info is there. Thanks