Which multifamily type you will prefer: potential appreciation or 1% higher cap

[Zhenyang Jin]

Hi all,

I am a newbie in multifamily investment and has one question about multifamily type selection:

1. Premium area like Menlo Park, Palo Alto where cap rate is about 3.7% but has potention high appreciation

2. Cash flow area near by like Mountain View, Sunnyvale, Campbell where cap rate is about 4.7% which is 1% higher but the appreciation rate may be lower than Preium area.

My target is to hold for at least 5 years or more and the IRR or cash on cash return is my first priority.

Suppose this property has the same potential on value add. I don't know which type I should choose. It looks like 1% higher cap rate can not accumulate much higher profit even holding the property for 5 - 10 years. May I have your insight?

Regards,  Zhenyang

[Sean Smith]

@Zhenyang Jin there are a lot of unknown variables in the scenario you present, however lower caps tend to produce more stable assets, with lower vacancy, in higher demand areas. Higher caps tend to produce more cash-flow day 1 but have potential risks (higher vacancy, lower demand, etc.). 

My two-cents: cash on cash is real, appreciation is speculation