Aaron has been attending various real-estate conferences and has learned about the real estate metric cap rate.
Aaron shares this information with his friends who are wanting to learn more about real estate.
Aaron explains that the cap rate tells an investor what return they can expect to get if they bought the property in cash with no loan and continued to operate it the same as the previous owner the cap rate is calculated by the net operating income (NOI) which is the property’s profit
minus its expenses divided by the property’s purchase price, for example if the NOI is $100,000 and the purchase price is $1,000,000 the cap rate is 10%.
Aaron says that cap rates are specific to location and asset class, for example an older C property in New York will sell for a lower cap rate than if you
took the same property and moved it to Alabama.
Aaron says to keep in mind that a cap rate is only a snapshot of the return and can be affected by many factors and cap rates don’t always stay
the same in a market.
Aaron and his friends now have a good understanding of the importance of a cap rate in real estate.