What is Cap Rate and How Is It Used?? | Cap Rate Explained
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The video explains what cap rate is and how it is used to value properties based on the income they produce. Cap rate is usually expressed as a percentage and is a quick and easy way for investors to determine the value of a property. Cap rates can be used for single-family investment houses, duplexes, four-family, six-family, or 500-unit apartment complexes, but are more commonly used for multi-family commercial buildings. The formula for cap rate is NOI (net operating income) divided by price equals cap rate, which is a percentage. NOI is the gross rental income that the asset is bringing in, minus real estate taxes, maintenance, property management fees, vacancy, and utilities. Cap rate is used to put a value on a building based on the income it produces, and should only be used for multi-family properties.
The video also notes that single-family houses are worth what the market says it is, and cap rates are not commonly used for them. Multi-family properties are less likely to drop in value as much because they are based on income. Investors usually trade multi-family properties, so they understand percentages and use cap rates to determine if a deal is good. The lower the cap rate percentage, the better the area of town, and the higher the cap rate percentage, the riskier the investment.
To calculate the value of a building, you need to know the net operating income and the cap rate for the area. As an investor, you need to do your own due diligence to verify the financials of investment properties being marketed to you and determine if you are getting a good deal based on the net operating income and cap rate for the area. The video emphasizes the importance of understanding cap rate and how to use it to evaluate properties quickly.
The video explains what cap rate is and how it is used to value properties based on the income they