Your least favorite class was the hot topic of the day
Yesterday, I taught a class on Investing in Real Estate. It was designed to help agents work with investors and invest in real estate themselves.
Some of the material was a dry and my goal was make it fun and interactive.
The whole class went well, except for one thing.
What I thought most people would consider boring, was the very thing they wanted to focus on.
That’s right. Most everyone’s least favorite class in school was the hot topic of the day.
They wanted to dive into the calculation part of the class and work with real life examples. And it got me thinking.
If these folks wanted to better understand the value calculations, then maybe you would too. So, I thought it would be best to tackle the most misunderstood calculation in all of investing history, the cap rate.
The cap rate, or capitalization rate, is a measure of the value of an income producing property. It is also a measurement of how much money you can make on your investment.
To measure the cap rate, one must know three pieces of information.
- Gross Income
- Operating expenses
- Current Market Value
The cap rate formula looks like this:
Gross Income - Operating Expenses = Net Operating Income (NOI)
NOI / Current Market Value = Cap Rate
Here’s a real life example.
- Gross Income = $12,000
- Operating Expenses = $2,500
- Current Market Value = $100,000
$12,000 - $2,500 = $9,500 Net Operating Expenses (NOI)
$9,500/$100,000 = 9.5% Cap Rate
So, an investor can expect to make 9.5% on his total investment in this property.
Note: this calculation is based on Net Operating Income which does not include costs of principal and interest payments, capital expenditures, and depreciation.
The cap rate is also helpful when comparing properties and trying to decide which is the best investment.
Now here’s where I need your help.
Hit reply and let me know if you found this useful, and if it was utterly boring tell me that too.
The Daily Deal in Nashville is this ranch home in Hermitage [near the airport] looks like a great deal for investors looking for a rental. It is listed for less than $140,000.