Help w/ Analyzing First Commercial Deal in St Louis

[Robert Larue]

Hi all,

Relatively new investor here, I own 7 units (SFR's and small multi), but trying to buy my first commercial multifamily apartment complex in Overland, Missouri (St. Louis area). I would be buying it at around a 9 cap. In my financial model, I need to do my best to predict what the exit cap rate will be and the sales price. If buying at a 9, increasing the rents and improving the property to an 11 cap over 5 years (or shorter)... what resources can I use to estimate the exit cap in this area? How do I analyze the exit in an increasing interest rate environment? Any good websites that have historic cap rates for certain geos? Any help or ideas are much appreciated!!

-Rob

[Chris Grenzig]

@Robert Larue It all depends on how conservative you want to underwrite. You're more likely to find data on the price per door than the cap rate, because the cap rate can be quoted as subjective. If I say it was sold at an 8% cap, was that on T12 numbers? T6? T3? T1? Pro forma expectations? Also, was the financials they gave you the real numbers, or did they have lower recorded financials to boost their NOI and thus their sale price? Or did they go the other way and run a ton of extra expenses through the property to lower their NOI to decrease the taxable income?

However, the price per door can often times be a better measure because it should be similar from property to property (assuming same submarket, style, year built, etc.) and significantly easier to find/figure out.

We use both to try and find a happy medium where we can justify to ourselves and investors the reasoning for what we came up with. At the end of the day it's extremely difficult to predict where the cap rates will be in an area. If you want to be conservative, ADD 10 bps per year to you're exit cap rate. While obviously the goal is to sell it at a lower cap rate, if it has a decent return at a higher cap rate than it damn well will return great results if you do sell it at a lower cap rate.

At the end of the day it's what you're comfortable with and what you can justify it with. 

Ex. bought at an 8% cap, 5 year hold, exit cap rate would be an 8.5%.