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What is a capitalization rate? The short answer is that a cap rate is calculated by dividing the net operating income (NOI) by the value of the property.
The long answer, however, is considerably more complex and surprisingly there is not an industry consensus.
To get some more insight into the topic, I interviewed 12 industry experts and also conducted some extensive research to see if I could get to the bottom of it.
The result is this documentary and spoiler: I didn't reach a convincing or satisfactory conclusion. However, I sure learned a whole lot during the process and I'm confident you will too.
Timestamps:
- 0:00 Introduction;
- 3:04 What is a cap rate?;
- 8:19 Is a cap rate a rate of return?;
- 14:05 My key findings;
- 23:18 How experts use cap rates;
- 37:02 Possible conclusions;
- 37:50 Where I stand;
- 38:43 Wrapping it up with a story.
Experts (Alphabetical):
- Daniel Abrahams - managing partner at ODAN Capital;
- James Bean - vice-president of SVN;
- Brian Burke - president and CEO of Praxis Capital;
- KC Conway - commercial real estate economist and futurist;
- Michael Golden - president of Goldstone Group;
- Bob Knakal - head of the NY Private Capital Group at JLL;
- Mark Lee Levine - professor at the Burns School of Real Estate and Construction Management at the Daniels College of Business;
- Jeremy Mercer - CEO of Matador Capital;
- George Pino - CEO of Commercial Brokers International;
- Mark Poechman - managing partner at Bourgeois Brooke Chin Associates;
- Chris Powers - executive chairman at Fort Capital;
- Ronald Rohde - lawyer, investor, YouTuber.
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