Question(s) regarding Cap rate

[Kevin Patterson]

I'm still new to the real estate investing game and in my studies I have recently come across cap rates. While I understand the basic idea of a cap rate and how it is calculated, I'm a little confused on how to read them. For example:

1) Are cap rates utilized to analyze SFR, or just for multifamily/commercial?

2) Do you always look for a higher cap rate in a deal, or is it sometimes advantageous to seek out properties with lower cap rates?

I've been doing some digging, but can't seem to find a consensus. Any clarification would be greatly appreciated.

[Robert Leonard]

@Kevin Patterson 

1) Both. Cap rates are always used for multifamily properties because they are valued based on an income approach. They are used on SFR for comparison to other investments, but not necessarily for valuation. SFR valuations are more influenced by comps for market valuation and a cap rate may never come up. But, at the same time, many advanced SFR investors will use the income approach for valuation of SFRs.

2) The answer to your second question is really specific to your strategy and market.  What I mean by that is, the highest cap rates are most often available in the toughest places to do business.   That gets into the strategy question of what you prefer?  After you read around a bit here on BP, you'll find some spirited "debate" for the full spectrum of strategies!