What is the cap rate on multi Family when buying to consider

In Buying Property - Asked by JOHN B. - Oct 22, 2010
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Nils R.
Fort Myers, FL

Hello John,
the answer can vary a lot, depending on property style, location, condition, management concept etc.
For prime properties you should target a gross return of 15%, which will give you about 9% net after cost (taxes, insurance, vacancies, repairs, utilities etc.). For low end properties this number has to be significantly higher to make it worth the investments, due to uncollectable rents, higher vacancy and repair cost - so definitiely aim for a gross number over 20%, better 25%. Also, the bigger the investment in this distressed market, the better the deals. Let me know if you have any other questions. Nils

Oct 25, 2010
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Rob M.
Seymour, IN

Hello John,
The CAP rate will vary depending on the Class of the property. A (Class A) property is typically 10 years or less in age, no deferred maintenance, many amenities to the tenants and most likely demand the highest rents in the community. Typically CAP Rates will range from 6.00-8.00% range and again this depends on your local market. A (Class B) property will be a little older than a (Class A) Property and have similar amentities, however due to the age and possible location may not be able to demand as much rent. A (Class C) Property is usually 30 or years older, does not have the amenities of the (Class A & B) properties and there will usually be some deferred maintenance. The CAP rates for these type of properties will range from 9.5%-12% maybe even higher if buyer demand is sluggish. (Class D) properties usually are in areas needing redevelopment and have a great deal of deferred maintenance and probably should be sought by seasoned knowledgeable investors. I hope this is helpful to you.

Oct 28, 2010
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Steve M.
Plano, TX

Hi John, The question seems simple but it is a moving target in terms of location, expenses, occupancy, rental rates, and other factors.
Class A on the coasts are currently trading from 5-6.25% CAP rates from what I have researched. These CAP rates are similar to 2005/2006 during the so-called bubble. Class A in the mid section is trading a little different at about 6-6.75% CAP rates. The fundamentals are down so from an absolute dollar value the buyers are paying less per unit (possibly) but the bet is on the come. This is taking place because there is such a gap in the available capital to be placed and the number of decent places to put it. It is, to a certain extent, also driven by 4% debt available from GSEs.
B and C properties will always have brokers touting CAP rates between 7% and 12% here locally in Texas but those are usually based on proforma numbers and can't be trusted without verification and the experience to know what you are looking at.
If something is reportedly selling on an 8.5% CAP rate but has payroll expense that is $400 per unit lower annually than what is typical- are you really buying an 8.5% CAP? Will the rents or occupancy continue to decline in the area or concessions go up- that can quickly make a 9% CAP a low yield deal- at least in the short run.
That is what I mean by moving target.
A CAP rate is a gut check- your results will vary- and theirs might not tell the whole story either. It is buyer beware on all counts, at all times, in all markets.

Nov 3, 2010
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