What's a typical cap rate on a small multifamily (2-4 units)?

In my area, large apartment buildings (15-50 units) can be bought for pretty respectable cap rates--7, 8, even 9%. I'm relatively new to the small multifamily business, but it seems that they sell for very modest cap rates. If a 2-4 fam nets 40k a year after expenses, it can sell for up to $1m or a 4% cap rate and at best maybe 650k or a low 6cap. Is it possible to buy multifams and get good cash flow, or is basically breaking even the only way?
In Buying Property - Asked by Alladin J. - Jan 5, 2009
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Answer(s)

Chris S.
Broker/Agent
Coeur D'alene, ID

Yes its possible, but the smaller the project the larger the potential investment pool (more people can afford it) that drives demand, demand drives down the cap rates. Also in my experience many of the smaller investors are less sophisticated and don't look beyond a cap rate. Think of cap rate as the curb appeal, it's just a starting point there are a ton of other things to consider.

Jan 5, 2009
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Rand W.
Owner/Investor
Tucson, AZ

Think of the Cap rate for small multifamily units as interest you would earn on a CD. With this in mind a 5% cap rate seems to be pretty enticing. The reason being that you are talking relatively small amounts of down payment capital, $150,000 or less. In the case of the 9% rate you are talking more along the lines of $350,000 or more for a 30% down payment on a $1.1 million apartment building. The greater the investment the greater the risk, the higher the rewards need to be.

Jan 6, 2009
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Jonathan P.
Broker/Agent
Devon, PA

Cap rate doesn't mean anything if your NOI doesn't cover your mortgage. Although I think a 5% cap rate is poor, it's not bad if you pay all cash. However, closing costs and other hassles are usually not factored in when calculating cap rates. Seldom does "5%" actually come to 5%. More desirable areas usually have lower cap rates. This is because of the renter (less hassle) and chance for appreciation.
If you're looking to operate as an investor I stay around 7% and above.

Jan 6, 2009
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