![]() The property’s CAP rate therefore is 6%: $60,000/$1 million=6%. After expenses, the NOI, not including mortgage, debt repayment, or interest charges, but before taxes, is $60,000. ![]() CAP Rate Formula Definition:ĬAP rate Formula : CAP rate = Net Operating Income (NOI) / Building value (BV).įor example, say the real estate value of a building is $1 million. The CAP rate is the building’s profit, before taxes and building depreciation, divided by the purchase price of the building. For those who haven’t, I cover the basics of CAP rate, pro forma CAP rate, and CAP rate Compression below.įollowing along with some of my calculations I’m going to show you how an improvement of $1 in profit in your property can produce a $25 increase in your net wealth. What is CAP rate?Īt the heart of investment in real estate is a concept called CAP (capitalization rate).įor those who have read my book, “ The Kickass Entrepreneur’s Guide to Investing ,” I cover this in some detail, so you’re likely already familiar with CAP rate. Now, don’t get me wrong, finding an amazing income-producing property and then negotiating the financing and purchase of it takes a lot of work and skill, but before you begin the hunt, you need to understand a few important formulas first. I wanted to share with you a simple but often misunderstood concept that is the first three things you need to know when moving into the investment commercial real estate market: CAP Rate, Pro Forma CAP Rate, and CAP Rate Compression, and lower down in this article I will explain how to make lots of money in a compressed CAP rate environment. You’re interested in getting into investment real estate. I also know many people who are interested in getting into investment real estate and are looking for pointers on what and how. That is especially true for those who bought investment real estate in the past decade, in particular, those who purchased during or just after the depth of the 2008/2009 recession. I know quite a few people who don’t own a business, but purchased rental and commercial real estate and have done exceptionally well. If you’re a business owner, you need to expand your business, maximize profits and invest strategically. ![]() ” Not surprisingly, business ownership and real estate are at the top of the list. I read an interesting article in Forbes magazine recently, “ How The World’s Billionaires Got So Rich. If you want to get rich in investment real estate there’s a simple, and yet, often misunderstood concept you need to understand, and that’s CAP rate, pro forma CAP rate, and CAP rate compression.
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