Cap rate important for triplex/4plex?

Question

Hi BP investors!

I am moving to the DC metro area after graduation in May with plans to house hack a duplex/triplex/4plex as my first property and finance with an FHA loan! It is my understanding that these small multifamily are appraised/evaluated from comps. However, in a high cost of living area like the DMV should I also consider the cap rate for these type of properties during deal analysis? Thanks for any comments or advice.

Russell Brazil · Answer

Cap rate is irrelevant on small buildings. Many landlords charge way under market rents, sometimes by choice, sometimes due to that landlors being subject to rent control while other landlords are not. The value of the building will be determined normally by what the other ones have sold for that are similar. I say normally, because in our current market, comparable sales bares no relationship currently to what buyers are willing to pay for a property. For sfh, rowhouses and multis, you will currently be paying substantially higher than the comparables suggest, and for condos less than the comparables suggest.

Chris Mills · Answer

Good morning @Joseph Gogal. Congratulations in advance on graduation! You're right about the DC area. Cap rates are abysmal compared to other markets in the country you could house hack in, but you should still know what you're getting into. Always know your numbers. At the same time, I would say it's still a good move. A 4-plex with good numbers is hard to come by, but if you find it, it can be a great starting point for your investing career because of the resiliency of this area.

Cassidy Burns · Answer

@Joseph Gogal typically CAP rates don't apply to any properties less than 5 units.  Anything 5+ units the value is derived off of the NOI (net operating income) that the property produces.  That being said, some investors that are buying STRICTLY as investment properties, evaluate singles on CAP to decide if it's a good investment or not.

When purchasing your primary residence and house hacking I always suggest to evaluate on IRR (internal rate of return) .

Good luck

Leo Watts · Answer

@Joseph Gogal

You’ll want to pull comps on similar properties. Though the MLS categorization of single vs multi is imprecise in DC. Sometimes you’ll see a single family with an illegal basement unit listed as a multi or a row house that COULD be converted to MF that’s actually just a single family listed as multi family or even listed both as a MF and a single family. I’ve also seen some duplexes that aren’t really triplexes listed as triplexes, or recently a single family listed as a triplex with no permitted work done and lots of non up to code work. Interestingly, square foot wise, I’ve seen some neighborhoods where single families are selling for more than duplexes of similar sizes. The buyer pool for single families is larger than for MF. There’s a lot of nuance and redundancy in DC zoning codes as it pertains to single vs multi family. The majority of single family homes in the district can be converted to duplexes (two family flat) or can have legal ADUs added, but the distinction depends on the underlying zoning.

Joe Gogal · Answer

@Leo Watts

@Chris Mills

@Russell Brazil

@Cassidy BurnsThank you all for your insightful feedback. I will keep this advice in mind as I explore investment opportunities!

Cap rate important for triplex/4plex?

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