How Cap Rates are Used in Multifamily Real Estate Investment

We know what cap rates are, but how do real estate investors actually use them when evaluating multifamily properties? Let's explore some key applications:

• Asset Valuation: Cap rates give a quick snapshot of how a property may perform relative to the purchase price. This allows comparing potential investments to see which could generate better returns.

• Investment Recovery: The cap rate also indicates how quickly you could potentially recoup the initial investment. A higher cap rate usually means a faster payback period - helpful for comparing deal terms.

But it's not that easy! Here are some limitations to keep in mind:

Cap rates don't account for financing costs or future changes in income/value, and also ignore capital improvements and vacancy rates. While super useful for initial assessment, cap rates shouldn't make or break an investment decision.

Important: The key is using cap rates as one tool among many when analyzing potential multifamily purchases. Check the cap rate, but also dig deeper into the property's finances, condition, market, and your own investing goals.

What is Considered a Good Multifamily Cap Rate?

The short answer is it depends! There's no universal standard since it relies on two main variables–your investing objectives and current market conditions. 

Some investors may be satisficed with a 4% cap rate, while others strive to find a 10% cap rate deal.

Some key factors influencing a good cap rate include:

• Property location

• Building condition

• Asset type (class A, B, C)

• Overall real estate market dynamics

Taking these into account helps set realistic cap rate expectations, but historically, cap rates between 4-10% are often seen in real estate.

Of course, a "good" cap rate for you might fall outside that range based on your investing goals and the specific property/market, so don’t get hung up on chasing a specific cap rate number. 

Focus instead on how the rate fits into your overall investing strategy and the market landscape, and let your particular objectives and the property details guide your definition of a "good" cap rate.

• Top Trends Across Cushman & Wakefield’s Portfolio

• Berkadia: National Report Card Q3 2023

• Multifamily Permitting and Starts Drop Further

• There’s Never Been a Worse Time to Buy Instead of Rent

• Majority of U.S. Apartment Renters Feel Satisfied

• Fed's preferred inflation gauge shows biggest monthly jump since May

• EMERGING TRENDS IN REAL ESTATE

• Supply Softens Occupancy and Leads to Rent Cuts in Austin

📈 Chart of The Week

In several urban core submarkets, the existing base of apartment units has more than doubled in the last decade, according to data from RealPage Market Analytics.

Unlike the nine downtowns that added the least amount of new supply in the last 10 years, these seven urban cores have added between 8,000 and 18,600 units during that time.

📈 Modeling Your Success,

• Free Multifamily Underwriting Crash Course (free model included)

• Miss Last Week's Newsletter? Read Here

• Private Facebook Community

• Follow NLFM on LinkedIn

👋 Did you enjoy this newsletter? The best compliment would be for you to share this on social media or with a friend.

📈 Professional Underwriting Service

👉 Do you want to outsource your multifamily underwriting work?

We are now accepting a limited number of sponsors to work with on a regular basis.

Why should you outsource your underwriting needs?

• Pay as you need

• Turn key solution

• No need to hire staff

• Saves an incredible amount of time

• Use a professional underwriting model

• Hire an expert for a fraction of the cost

• Ability to focus on growing your business