Confused on Cap Rate

[Ashley Wynn]

After reading several real estate books, blogs, and listening to podcasts, I'm still confused on the purpose of cap rate specifically for commercial multifamily properties. If cap rate is based on factors such as property type, location, condition, etc...but expressed as Cap Rate = NOI/Value(purchase price) then it seems that cap rate should vary and not be a set number based on the market because it can easily be manipulated. For example, cap rate could change by simply reducing expenses or by increasing rent. With that said, how do you use cap rate when looking to purchase and sell? It just seems like cap rate should be specific to an asset and not the market. Also, since it's based on the current condition, how is that helpful when analyzing a deal? There is an 8 unit multifamily that's on the market for $224,900 in my area with a cap rate listed as 9.33%. It looks like it needs a lot of updating based on the outside condition (I have not seen the inside yet). Rearranging the cap rate equation, I can determine the NOI is ~$21,000. With rents at 650/unit as stated by the seller (also the current rent rate for the area), that's a gross annual income of $62,400. I can determine from the NOI that either all the units aren't occupied or they're spending too much on expenses. How is this useful when determining if this is a good purchase price considering there's going to be rehab needed and room for improvement? When it's time to sell how do you use the cap rate to determine the sales price? Maybe I'm looking to deep into it, but any clarification would be appreciated. Thanks!!

[Jared Forman]

cap rate is a loose translation for your yield. So if you reduce cost, your return goes up and yield goes up. So your property is worth more. 

the currently issue with looking at proforma data is just that, it is someone's interpretation. If it is a ba k they are projecting low, if it is a broker they will project high. Always underwrite yourself to avoid and mitigate losses