Cap Rates 101

Capitalization rates (cap rates for short) are one way to talk about estimated investment returns in real estate.  You’ll hear them mentioned a lot, such as “the cap rate is too low for this market”.

What is a Cap Rate?

The cap rate indicates the rough return on investment for a specific property at a specific point in time.

Net operating income (NOI for short) = how much a property makes after all expenses are paid except the mortgage (if applicable).

Market Value = how much the asset would sell for.

NOI/Market Value = Cap rate

Simple right?

Be careful – the NOI is calculated in different ways incorporating different expenses for different properties.  Market Value is what someone (including you) is willing to pay for it and will be different depending on different buyers’ situations (such as who can get better loan terms or have access to economies of scale to reduce costs after closing).

Ask which ones are included, walk through the assumptions or do your own due diligence.  You absolutely have the right to access the underwriting, expense and income information for a property before investing.  Keep in mind numbers can be adjusted a lot to support the point of whoever is running the calculations. The banks all get this, as an investor it is important you do too. If someone won’t share the data with you so you can check it, that’s a red flag.

What do I use a Cap Rate for?

There are a few general trends for cap rates:

  • Properties perform better when they are bought at a high cap rate and sold at a low cap rate.  This typically involves adding value to the property and/or changing market conditions.
  • Properties with lower risk tend to have lower cap rates than properties with higher risk.

The most useful thing is to compare properties in the same market.

Say a broker is offering a property at a 5 cap (that’s shorthand for a 5% capitalization rate). If other properties in the area are selling at a 6 or 6.5 cap, that’s a flag that either this property is much lower risk than the others OR the market value is higher than it can bear OR expenses have been creatively book kept to be very low.  Or a combination.  No matter which, it’s a flag to go dive deeper into the property finances.

For investors, cap rates can also raise a flag that underwriting may not be conservative.  If the cap rate at purchase is the same or greater than the assumed cap rate at sale, the underwriting is not conservative.  Banks generally assume an increase of 0.15/yr, so on a 5 yr hold 0.15*5 = 0.75 increase in cap rate.

Fun fact: the cap rate assumed at sale of a property is called the reversion Cap rate

Cliff Notes Questions for Investors

If you’re looking at a deal, here are a few Cap rate questions to ask the people who are underwriting it:

  1. What is the current cap rate and reversion cap rate?
  2. What are the cap rates for 3-4 similar properties in the same market?
  3. How have the expenses used to calculate NOI changed over the past 3 years?
  4. Will you walk me through your underwriting (or send me a link to it)?

If you have questions or want to learn more, set up a call and Join Club Clover.


How Do I Discover My Goals?

Reshaping your life begins with a goal.

Sometimes we are so stuck in our life habits that it is difficult to figure out what our goals are for our lives.  This guide will help lead you through a thought process for identifying current goals.

Then come back to this at least once a year, preferably more often, to change and adjust them as your life adapts.

Also?  This should be fun!  Turn on some music, pull in a partner or pet, and most importantly view this as an enjoyable next step towards living your best life!

Step 1: Dream Up

Answer the following questions, it helps to write them down so you can reference them later

  • What are your favorite things to do right now?
  • What do you see others doing and wish you had the time/energy/money/whatever to try?
  • What is the most exciting and fulfilling thing you can think of doing in this life?

Now take each of your answers and answer the following:

  • What would make this even more epic?
  • Would combining any of them make it even more unbelievable?
  • How many people would you want to do it with you?  Does more or less people sound more fun?


One of my favorite things to do is play volleyball.  I love the team aspect of it, the way everyone knows their role but also can step in to cover for everyone else.  I dream of being able to go play 1-2 times a week.  Making that more epic to me would be getting to play on an island (Hawaii? Thailand? Madeira?) in perfect weather with a group of people I enjoy, for a few weeks, focused only on being in the moment and enjoying every second.

Step 2: Drill Down

Pick the activities that made you smile the biggest for now.  You can come back and do this step with the others later.

Now ask yourself: Why does this seem hard or unachievable?  List all the reasons you can think of. It’s very important to write these down.  The more detail the better.

Back to our example:

For me this is hard because (1) I haven’t played volleyball in a few years thanks to a combination of Mom life and COVID, (2) Therefore I don’t have a group of friends that I play with right now, (3) I don’t have a budget or free time to go on a trip like that.

Step 3: Start Small

For each of the reasons in Step 2, think of 1 small thing you can do to make that a bit easier.

Here are a few ideas:

  • Take one deep breath to think clearer
  • Search for a related word on the internet
  • Ask for advice (a partner, a pet, a stranger)
  • Write down all words/phrases related to it
  • Do one squat
  • Transfer $1 to savings
  • Each one less french fry
  • Send one thank you text

Example continued:

Starting small ideas (1) would be searching for volleyball courts as close to my house as possible along on the internet.  (2) Asking my social media groups if any of them play or know of groups that play (3) Researching options to fund a trip like that which won’t impact my normal budget (passive income from real estate perhaps?)

Step 4: Grow Large

Ask yourself, which of these small steps can I do a few times a week? For 2-3 of them, set a recurring reminder on your phone to do it.  If you miss it, do it the next time.  More than 2-3 can be overwhelming at first, so give it a few weeks of trying and then add in (or change to) another.

Each time you do one, have a mini-celebration!  Play a song, do a dance, hug a kid/pet/plant, or a fist pump.  Each one is a step towards that big dream, and you’re training your brain to work towards your goals.  That’s a big change in your life’s direction!

As you integrate these small steps towards making “unachievable” into “I can do this”, you will naturally try more than you can handle, fumble, learn, then try again.  Congratulations, this means you’re working towards your goals.

Example finale:

I picked reason 3 (budget and time constraints) to focus on for now.  Seeing the progress towards the goal in a relatively short time is what prompted me to start Club Clover so that I can empower others to find their path.

The Plan

These small steps turn into larger ones, and every time you go through the exercise you get better at identifying commitment mechanisms that work for you.  One key thing is to write down your goal and post it in a visible place.  Look at it every day.  Change it as you want.  Keep updating and working the plan to overcome the obstacles, and “unachievable” turns into “hard” turns into “might happen” and finally into “I DID IT!”

Once you have your goals, Iet’s chat about if real estate investing fits into your current plan.  It’s a powerful tool to overcome the common budget and time freedom obstacles often between us and our goals.  I’d appreciate the opportunity to help you to achieve your goals.

More Resources:

If you’re looking for an interactive way to think through this, or want more data on how to set and achieve goals, try WOOP.  It’s 20 yrs of science in a simple to understand way.  Or if you prefer audio, try this The Happiness Lab episode to start.




Entering Real Estate Investing

When you think of real estate investing, what pops into your mind?

For most people just discovering the space, it’s buying a single family home similar to theirs then renting it out.  The rent covers any mortgage and repairs plus a bit more to provide some emergency funds and income to cover your time/effort.  Over time your home value goes up (equity), get some tax advantages (depreciation) and a bit of cash flow each month.

Equity, depreciation and cash flow are also the main drivers of income on larger properties and combine to make real estate one of the most common places for high income earners to place their money.  Real estate is an appreciating asset – it tends to go up in value over time so your money works to make more money.

What’s fun about RE is that you don’t have to own it alone.  In fact it’s a real team sport!

  • Don’t want to be the one screening tenants or dealing with maintenance issues?  Then invest as a limited partner (LP) with a team you know, like and trust to operate the property for you.
  • Don’t have a lot to buy the whole thing yourself yet?  Team up to buy a property (also called a syndication or joint venture)
  • Looking to be part of the decisions to learn about running larger properties and a RE business? Join a general partner (GP) team to get hands-on experience alongside other team members.

Other team members can include brokers, property managers, maintenance vendors, tax accountant (CPA), lawyer, bookkeeper, the list keeps going.  The stronger your network, the more robust the business plan is and the faster your investment can grow.

Real estate has a strong track record of building long-term wealth through leveraging equity, depreciation and cash flow.  It’s not a get-rich quick scheme, it is a way to invest in the community that is strongly supported by government tax policies and the basic need for housing.  It’s a team sport where no matter your goals, you can get started relatively simply and grow from there.

Interested in learning more?  Contact us and we’d be happy to help you on the path to building your own luck.