Question
The ten cap price is a method used in value investing, often associated with Warren Buffett. It's based on owner earnings and is short for capitalization. In real-world scenarios like buying a farm or a building, the ten cap price is the rate of return the property owner gets each year on the purchase price of the property. For instance, if you buy a farm for $500,000 and at the end of the year you have $50,000 in your pocket, then your cap rate was 10% – a ten cap. This is a requirement for investments made by Buffett and his partner, Charlie Munger.
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The ten cap price is based on owner earnings; cap is short for capitalization. In his 2014 letter, Buffett describes using this method to pay for a farm in Nebraska and a building in New York City. A cap rate is the rate of return the property owner gets each year on the purchase price of the property. If you buy a farm for $500,000 and at the end of the year you have $50,000 in your pocket, then your cap rate was 10% – a ten cap. Buffett and Munger require a ten cap on their investments.
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