Ken - the last piece of advice you give here, “buy at a high CAP rate and sell at a low one” is great, but you left out one important question: HOW DO YOU DO THAT? Is it totally determined by the market (I.e. out of investors control)? If so, what does one do in today’s environment when (where I invest) we are setting CAP rates in the 4-5% range?
I think should have been said backwards... why would you buy either a cap rate of 10% and sell with a lower cap rate? Even if the property goes up the cap rate would go down only if you never increase the rents.. so technically 1 million property goes up to 2 million then sell at a minimum of the same cap rate of 10% but that number actually increased to 200k.. I think he messed up the last part, and if there is a 30% vacancy and ypu sell when you are 90% to 95% full, then this is when you want to exit the property cap rate then maybe is 12 or 13% ( higher price even if property price was stagnant)
Not so pro tip - If you see a cap rate as part of the marketing material for the property, it's probably wrong. I can't count how many times agents either knowingly or unknowingly misrepresent the number. Most of the time it's not taking all/any expenses into account.
When valuing a property, the initial cap rate is used to estimate the expected cash flows and risks associated with holding the property over a certain period of time. However, when it comes time to sell the property, there may be additional risks and uncertainties that could affect its value, such as changes in market conditions or unexpected repairs. This increased risk associated with the sale of the property leads to a higher exit cap rate. The exit cap rate reflects the additional risks and uncertainties associated with the future sale or disposition of the property. In other words, the exit cap rate should be higher than the initial cap rate to account for the increased risk and uncertainty of the future sale or disposition of the property. Hope this helps
The exit cap rate should be lower because your property value should be higher than you initially bought it. If at initial NOI is $100k and Value is $1m, entry CAP rate is 10%, but if your selling and the NOI is $150k and the value is $2m, exit CAP rate is 7.5%. This means your property value grew at a higher rate than NOI, which is good for you as the seller.
This is long overdue but Thanks for everything Ken! Been following you for the past month or so and you’ve helped me to gain the confidence to start my journey as an investor. (I’m in the process of buying my first rental property!) Thanks again for everything!
Direct capitalization is used to value properties. Since you have the value why are you wasting time trying to calculate a cap rate? That is backwards.
Ken, I need some serious advice please. I’m looking into being a first time home buyer in California but currently we’ve all seen the housing market skyrocket in the past few years. I’m currently looking to purchase a home in central California (Sacramento-San Joaquin region) but extremely hesitant at these outrageous prices. For example, majority of 3 bedroom/2 bath home is currently going anywhere from $400-800k depending on location/neighborhood…….these same homes used to be $200-300k a few years ago……I definitely don’t want to buy this at the top when everything is about to crash all over again…..thank you for your time and advice/suggestions.
NOI increase has no effect on the cap rate. it would increase the value because that is what cap rates measure. If NOI is selling for $10, a 10% cap rate then if you increase NOI to $1.10 the the new VALUE is $11. $11=$1.10/10%
I understand that as far as property purchased for the purpose of rental income. How is property that is paid for and later converted to rental property calculated as far as cap rate is concerned?
Wouldn’t high cap rate when you buy be expensive, and low when you sell be cheaper? It Sounds like a losing deal, you would be buying high and selling low right?
Is it that NOI gets measured yearly and then the value portion of the equation is measured based on the price you agree to? So NOI, when you pay the house off goes up the (for example) 10k per yr you would be spending on the P & I. Am I understanding that correctly? Also is there anything you would not include in the expense portion of the equation or is it literally every penny?
Hello ken McElroy, thanks for the great video it helped a lot, can you please elaborate on why you want the cap rate to be lower when you exit or sell?
A lower CAP rate is typically prescribed to properties that are of lower risk to the investor. eg: properties that need little to no improvements (not a fixer upper), and are in low CAP rate areas, like a a nice neighborhood, is occupied by a strong, credit tenant, has low expenses and allows the investor the ability to increase NOI. There may be other examples, but in general, low CAP rate properties are deemed low risk so naturally, the investor will pay more to acquire the property.
It's either I'm missing something or misunderstanding. You want to buy low and sell high right? If you are buying something for 3 cap rate then bring it up to 6 cap rate and sell it.
The whole point of investing in the style of Ken (and most others that think in like ways) is to buy low and hold while it puts money in your pocket. Buy low sell high is investing for capital gains, which doesn't have nearly as many of the benefits as investing for cash flow does. If investors like Kenny want a cash injection, they will refinance at the higher CAP rate (which the bank views as the business is worth more). The cash flow is reduced, but it's still continuing to put money in the pocket. If you have something that pays you every month to own it, as well as provides huge tax benefits, why would you ever want to sell? Don't kill the goose laying the golden eggs.
Also, if you do sell, you want to do so at as low a CAP as possible. For instance, let's say you purchased a property at a 10% CAP and sold it the next day at 5%. You didn't change the NOI, but you doubled your money. To illustrate, I'll use small numbers. You paid $100 for something that makes $10 a year, or 10/100 = 10% CAP. You sell that item at a 5% CAP. 10/x = 5% -> 10 = x(5%) -> 10/5% = x -> x = 200 You sold it $200 the next day by selling at a lower cap rate.
A higher cap rate means you have lost VALUE! At 5% your NOI is worth $20. At 10% your NOI is only worth $10. You lost half your value. No bank gonna refi you.
@@jbrandonporter What if you improve the property by say, agreeing to install dishwashers on all the units? Then you charge a higher rent for the convenience. Since the neighborhood and location of the property didn’t change, you maintain the same 10% cap rate. However by keeping the same cap rate, you’ve been able to increase the value of the property for a one time investment. You still return a profit from the appreciation of the property when it’s sold.
I like at 2:38 when he licks his finger before he “turns the page” like it’s really paper 😂
Ken - the last piece of advice you give here, “buy at a high CAP rate and sell at a low one” is great, but you left out one important question: HOW DO YOU DO THAT? Is it totally determined by the market (I.e. out of investors control)? If so, what does one do in today’s environment when (where I invest) we are setting CAP rates in the 4-5% range?
Is it because the property value is higher and he can sell for a profit and buy again property with better cap rate ?
I think should have been said backwards... why would you buy either a cap rate of 10% and sell with a lower cap rate? Even if the property goes up the cap rate would go down only if you never increase the rents.. so technically 1 million property goes up to 2 million then sell at a minimum of the same cap rate of 10% but that number actually increased to 200k..
I think he messed up the last part, and if there is a 30% vacancy and ypu sell when you are 90% to 95% full, then this is when you want to exit the property cap rate then maybe is 12 or 13% ( higher price even if property price was stagnant)
What would be a better cap rate?
Not so pro tip - If you see a cap rate as part of the marketing material for the property, it's probably wrong. I can't count how many times agents either knowingly or unknowingly misrepresent the number. Most of the time it's not taking all/any expenses into account.
Wouldn't that be where due diligence comes in?
I agree, many times they don't get it right. Had a realtor tell me recently that these newer inexperienced agents don't even know what a cap rate is.
@@brendasmith1533 I see brokers trying to sell at 5.5% when the market past 12 months is around 7.5%. Insane!
Always do your own research. Trust yourself.
Thank You for all of your videos that you did. I am enjoying all of them
You are an inspiration Ken!
You inspired me actually to start my own channel.
This was a good video, explanation. It would be a bit better if you would have spoke more about the exit cap rate and how, why this gets lower...
When valuing a property, the initial cap rate is used to estimate the expected cash flows and risks associated with holding the property over a certain period of time. However, when it comes time to sell the property, there may be additional risks and uncertainties that could affect its value, such as changes in market conditions or unexpected repairs. This increased risk associated with the sale of the property leads to a higher exit cap rate. The exit cap rate reflects the additional risks and uncertainties associated with the future sale or disposition of the property. In other words, the exit cap rate should be higher than the initial cap rate to account for the increased risk and uncertainty of the future sale or disposition of the property. Hope this helps
@@Rose-re9tn Seriously, buy high, sell low!? LOL
The exit cap rate should be lower because your property value should be higher than you initially bought it.
If at initial NOI is $100k and Value is $1m, entry CAP rate is 10%, but if your selling and the NOI is $150k and the value is $2m, exit CAP rate is 7.5%. This means your property value grew at a higher rate than NOI, which is good for you as the seller.
This is long overdue but Thanks for everything Ken! Been following you for the past month or so and you’ve helped me to gain the confidence to start my journey as an investor. (I’m in the process of buying my first rental property!) Thanks again for everything!
Direct capitalization is used to value properties. Since you have the value why are you wasting time trying to calculate a cap rate? That is backwards.
Thanks for this excellent lesson!!
This was GREAT! Thank you!
Wow! Perfect lesson! If your master course is a lot like this, its definitely worth the money! I'll be checking it out.
this is a powerful lesson..thanks Ken
Why when selling you want the cap rate to be lower?
Wouldn’t it look good for the buyer that the cap rate is high?
And wouldn't the higher cap rate add to the market value of your property?
Clear Ken. Thanks for being there
Great delivery!
Great and informative video. I subscribed and am interested in watching other videos. JP
Awesome, thank you Ken....
Well said, thanks Mike.
Fantastic Job Ken!
Great!
Thank You!
ken your the boss, thanks man, your vids are gold
Awesome thank you!
Love you bro
Ken, I need some serious advice please. I’m looking into being a first time home buyer in California but currently we’ve all seen the housing market skyrocket in the past few years. I’m currently looking to purchase a home in central California (Sacramento-San Joaquin region) but extremely hesitant at these outrageous prices. For example, majority of 3 bedroom/2 bath home is currently going anywhere from $400-800k depending on location/neighborhood…….these same homes used to be $200-300k a few years ago……I definitely don’t want to buy this at the top when everything is about to crash all over again…..thank you for your time and advice/suggestions.
Hi Ken, Does NOI already deducts the cost of interest payment?
If NOI increases cap rate also increases how can one sell at a lower cap rate!?
Exactly….good question
NOI increase has no effect on the cap rate. it would increase the value because that is what cap rates measure. If NOI is selling for $10, a 10% cap rate then if you increase NOI to $1.10 the the new VALUE is $11. $11=$1.10/10%
how to declare a 3 unit building while living in one unit in the taxes
whats a good cap rate 7% and below?
7% or more look at cash on cash in so calif 5% cap guess is good but price per door is very high 10units $300,000 door
Nice content
I understand that as far as property purchased for the purpose of rental income. How is property that is paid for and later converted to rental property calculated as far as cap rate is concerned?
I dont get it ...so what you just dream up the value on paper ????
Why do you say link below but it’s up🙄
Wouldn’t high cap rate when you buy be expensive, and low when you sell be cheaper? It Sounds like a losing deal, you would be buying high and selling low right?
Am investing my time and money in crypto now, this new price is a clear sign for new investors to come in ✅✅
Why do you want to sell at a low cap rate?
The lower the cap rate, the higher the sale price.
So is a 10 % cap rate a good benchmark to begin
What white board is that?
Is it that NOI gets measured yearly and then the value portion of the equation is measured based on the price you agree to? So NOI, when you pay the house off goes up the (for example) 10k per yr you would be spending on the P & I. Am I understanding that correctly?
Also is there anything you would not include in the expense portion of the equation or is it literally every penny?
Hello ken McElroy, thanks for the great video it helped a lot, can you please elaborate on why you want the cap rate to be lower when you exit or sell?
A lower CAP rate is typically prescribed to properties that are of lower risk to the investor. eg: properties that need little to no improvements (not a fixer upper), and are in low CAP rate areas, like a a nice neighborhood, is occupied by a strong, credit tenant, has low expenses and allows the investor the ability to increase NOI. There may be other examples, but in general, low CAP rate properties are deemed low risk so naturally, the investor will pay more to acquire the property.
@@RealEstateChris56 you want the cost (selling price) to go up, lowering the cap rate.
Go deeper at a higher level. CAP rate videos are for 101 level
This still confuses me if I buy a house for 70k and make $300 there no way the cap is 233
It's either I'm missing something or misunderstanding. You want to buy low and sell high right? If you are buying something for 3 cap rate then bring it up to 6 cap rate and sell it.
The whole point of investing in the style of Ken (and most others that think in like ways) is to buy low and hold while it puts money in your pocket. Buy low sell high is investing for capital gains, which doesn't have nearly as many of the benefits as investing for cash flow does. If investors like Kenny want a cash injection, they will refinance at the higher CAP rate (which the bank views as the business is worth more). The cash flow is reduced, but it's still continuing to put money in the pocket.
If you have something that pays you every month to own it, as well as provides huge tax benefits, why would you ever want to sell? Don't kill the goose laying the golden eggs.
Also, if you do sell, you want to do so at as low a CAP as possible. For instance, let's say you purchased a property at a 10% CAP and sold it the next day at 5%. You didn't change the NOI, but you doubled your money. To illustrate, I'll use small numbers. You paid $100 for something that makes $10 a year, or 10/100 = 10% CAP. You sell that item at a 5% CAP. 10/x = 5% -> 10 = x(5%) -> 10/5% = x -> x = 200 You sold it $200 the next day by selling at a lower cap rate.
@@jbrandonporter Kenny simply doesn't understand what a cap rate is.
A higher cap rate means you have lost VALUE! At 5% your NOI is worth $20. At 10% your NOI is only worth $10.
You lost half your value. No bank gonna refi you.
@@jbrandonporter What if you improve the property by say, agreeing to install dishwashers on all the units? Then you charge a higher rent for the convenience. Since the neighborhood and location of the property didn’t change, you maintain the same 10% cap rate. However by keeping the same cap rate, you’ve been able to increase the value of the property for a one time investment. You still return a profit from the appreciation of the property when it’s sold.
Simply put smart people invest and dumb people spend and save!!!
You are wrong, higher cap rate means lower price
Thanks for the info!
What’s the reason why you want to buy high cap and sell low cap?
Bitcoin is the future investing in it now is the wisest thing to do now especially with the current rise
Usually one time per sentence.
Ken, thank you. I will meet you one day. I've learned alot from you and Robert.