Spoiler Alert, The Answer Is 9: Understanding Cap Rates

Brad Thomas over at Forbes relates a great story about Bob Ellis, a Harvard professor who began his RE MBA courses with a big reveal: "The answer to the final exam will be nine”.

Ellis would go on to explain that he would be teaching the students about real estate over the next few weeks and at some point the subject of “cap rates” would be discussed. He said that he was going to lecture on a variety of real estate asset classes (hotels, office buildings, etc…) and when he was finished he would give a final exam in which he would ask the students “what is the average cap rate for all of the buildings we discussed?”

Why would a professor give away the answer to the final exam? Well, that's the point of Brad's article and worth the read (hint- think exit cap rate*).

If you're having trouble explaining (or coming to grips with) cap rates and why they're important, I wrote a post called Why are Cap Rate explanations so complicated? that makes it all very simple. If you are a stock & bond investor or you work with them this post Converting Cap Rates to Earnings Multiples will explain cap rates in terms that are familiar and used every day in the equities markets.

Good hunting-

*20+ years later we typically model exit cap rates on apartments between 7 and 7-1/2% depending on age and class.

P.S. If you'd like a copy of the Cap Rates to Earnings Multiples Chart shoot me a message at [email protected]