How To Analyze Cap Rates in Multifamily Real Estate Investing

Learn how to analyze cap rates in Multifamily Real Estate Investing from Jake & Gino.

In brief, “Cap rate” or capitalization rate is a metric that measures the net operating income a property generates divided by the purchase price.

If you invert this metric, then you have the purchase price divided by the net operating income. This is essentially the same thing as an enterprise value-to-EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiple (EV/EBITDA) that is used to value companies in both the public and private markets (the caveat being that net operating income does factor into property taxes). With this context, it is understandable why both folks relatively new to real estate and those more experienced place value on “cap rate.” It is because this is a metric they use in the public markets when deciding which stocks to buy, especially when they are value investors.

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