What is the best cap rate on multi Family when buying to consider (apartments)

In Buying Property - Asked by JOHN B. - Oct 22, 2010
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Answer(s)

Marty H.
Broker/Agent
Lenexa, KS

Cap Rates can run in a very wide range. In very general terms, a buyer wants to pay the lowest price possible so he or she will want to acquire property at the highest possible Cap Rate. Cap rates will vary due to a wide range of factors impacting a given property. Location, strength of tenants, vacancy rate, condition of property, existing demand etc., etc. However, while Cap Rates are an easy guide to use when sorting through alternative deals, they pretty much go out the window when the buyer brings financing alternatives into play. Internal Rate of Return calculations that take into account multi-year income and expense figures become much more meaningful. The due diligence process for vetting alternative investments can also be very complex. You want to be able to determine what the "actual" net operating income is for the property and then determine the potential for it to continue or improve. Often times I see Cap Rates advertised which are based on "Projections" or on numbers that aren't very detailed in nature. Thus, you want to be able to verify all the expense and income numbers. If the owner isn't showing that he is spending money making repairs and maintaining the property he is either neglecting the property, doing work himself and not billing the property for it, or he is conveniently "forgetting" about some expense items so his Net Income looks better.

Oct 22, 2010
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Charlie A.
Broker/Agent
Port Townsend, WA

In Jefferson County, we are seeing a 6.5-8% cap rate range. A good cap rate in our market is anything over 7.5% for multi-family.

Oct 22, 2010
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Bob M.
Half Moon Bay, CA

The more important question is, "What are the market cap rates in the area where you want to invest, specifically for the type of property you want to buy?" Know your market before you invest. Bob McComb, Author of The Field Guide to Commercial Real Estate Investment

Oct 29, 2010
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Steve M.
Owner/Investor
Plano, TX

John,
You have gotten some good answers here already. Nationally reported CAP rates for class A newer properties have been in the 5.5% to 6.25% Range for the past 12 months according to major publications and market reports. Moving up from there depending on age/location/condition, etc. The publications generally say 150 to 225 bps for B class and then higher for C class properties.
There are many variables. I am in the Dallas, TX area and always try to get my projects performing at a level where I can sell them for between 8.75% CAP and 10.25% CAP with full renovations completed.
If you buy a 10% CAP rate deal and it needs $5,000 per unit in rehab, are you really buying a 10% CAP? That is an example of the issues that come up with CAP rates.
CAP rates on actual numbers or CAP rates on what the broker thinks you can do next year because you are so handsome and savvy that your expenses will be lower and your customers will want to pay you more.............kidding on that but I think you get the point.
The main thing is to look at the real numbers, are the expenses fully loaded- i.e. property taxes included, management fees included, etc, etc.
In today's market where many properties are being bought from banks in REO dispositions the CAP rates might be 1% based on actual numbers. These could have been based on 48% occupancy for the last 12 months so it is not easy or smart to rely on CAP rates to determine where/when to invest.

Jan 17, 2011
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