Are you wanting to get into the real estate game but don't know any of the lingo? Parse through this plethora of lessons where you will learn the meaning and specific application of dozens of real estate terms taught by the incredibly successful Michael Burer.
Featured Coaching Excerpt - Notes & Transcript, Part 1
Capitalization Rate: A percentage that relates the value of an income-producing property to its future income, expressed as net operating income divided by purchase price, also referred to as cap rate.
Lesson Nugget: 6 Cap = 6% return
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-We are here with Michael. There is no real estate topic period on the planet to obscure Burer talking about capitalization rates. We're in San Diego on Thrive15.com, an alternative to Lynda.com . We could be over here. If we were just a hop on the other side of this railing, for instance, we could be having a good old time, but we are here have a good old time talking about capitalization rate. I'm going to read the definition, he's going to give us an ample example of what it means, and here we go.
A percentage that relates to the value of an income-producing property to its future income, expressed as net operating income divided by purchase price. Also referred to as cap rate. When people say, what's the cap rate, what does that mean?
-Well, it's describing the yield that you would expect to get from a property, or how much money you think you'd get from the property. So if the property cost $100 and it had a 6 cap, you'd expect that you'd get $6 per year in income. So it's a way of comparing two different assets. This a 10 cap, this is a 6 cap, this is an 8 cap, it gets--
-8 is a percentage.
-It's a percentage.
-OK, it's a percentage. So if I say, I've got a 22 cap. One, you're going that's crazy. Probably not real, but that's 22%.
-If you're watching this and it doesn't make sense here, we really want to make it just crystal clear. And if you already get it I apologize for belaboring it, but what you'll find is you get into the world of real estate investment is people will constantly say, what's the cap rate? What is the cap rate? They say it all the time, and so when do you see this terminology get thrown around from your job working at a real estate?
-When you're buying and selling, when you're valuing a building you talk about the cap rate.
-This term is used more than almost any other term. You hear it all the time, don't you?
-Yeah, definitely. You hear it quite a bit, and as a market is improving you would expect the cap rates to fall and in a declining market you'd expect cap rates to rise because investors would need a higher yield.
-Oh, boy, you're getting deep for a second. You said, in a declining market, when the economy is getting worse, what would happen?
-Cap rates would go up.
-Because investors would need a higher yield or more return on their invested dollars in order to purchase that same building.
-OK, now, if you're watching this and you don't get it just put that in reverse. Rewind it. I just want to make sure that we totally get this idea. Now Michael, I appreciate you being here, really, but there aren't enough unicorns in the world that I could give to you as a gift to express how much I appreciate you being here today.