Lesson 14: What is the Cap Rate?
In this video we're gonna talk about the capitalization rate and why that's important. You probably heard it referred to as the cap rate, so cap rate, capitalization rate, same thing. And what it is, this is a rate of return that's calculated based on what you think the property's gonna generate in the future.
So here's the actual calculation. Net operating income divided by the market value of the property gives you the cap rate. Basically, the market value of the property is what similarly place property sell for. So here's a good example. Let's say a property has an NOI of a hundred thousand dollars and it's sold for a million dollars, then the cap rate is 10%.
And why that's important is when you're looking at properties to either buy and or sell, you need to figure out what it should be valued at, right? So what you have to do is you have to go look at other assets that have sold in the marketplace and say, Okay, what did they sell for? And what was the net operating income?
You do that calculation, you come up with a cap rate, so let's reverse engineer this. You go back, you find the cap rate. 10% and your property or the one you're looking at is a hundred thousand dollars of NOI, then the value of that property is a million dollars. So that's how you determine the value of properties.
Hopefully that was helpful. Please like, subscribe and follow, and we'll see you soon.
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