Cap Rate of MFH

[Roy Mcdonald]

Hi there,

I am new in this forum.

I am interested in evaluating a MFH building .

What is the cap rate that i am looking for?

Is there an average cap rate for each segment and area in the us? if so , where can i find it?

What is the reasonable cap rate or how can i determine the realistic cap rate?

It is obvious that I'm looking for the highest cap rate but i don't know what is a reasonable cap rate.

Thank you

[Michael Shadow]

Cap rates are only a general guide line. To use the cap rate number effectively you need to understand how to evaluate a property. Please see my reply to your other post on how to find this information on BiggerPockets.

To answer your question, most places have cap rates that are to low. For example in my area most properties are listed with a TRUE cap rate (including all expenses that most people leave out) of around 5 or 6. Personally I don't think anything with a cap rate under 10 makes sense from a business point of view.

Cap rates vary greatly by area, even down to the neighborhood level. For example a neighboring town it's pretty easy to find a cap rate of 9 while in another town the cap rates are around 3.

Usually a higher cap rate means a less desirable area and more work that needs to be done to the property. The higher the desirability of a property the lower the cap rate.

-Michael

[Roy Mcdonald]

I know how to calculate the cap rate.

If i want to know what is the fair value of the MFH:

What cap rate should i take into concern in order to know if the property is undervalued?

Where can i find or how could i know the right cap rate to the area?

How do you know if 6% is too low or too high for a specific area?

Thank you very much

[Michael Shadow]

A local real estate agent should be able to tell you the average cap rate for the specific type of property you are looking at.

Banks don't tend to go on cap rates on 4 units or less. If you are looking at 5+ units then the NOI is strongly considered. We have some bankers here that will probably help clarify for you what they like to see.

-Michael

[Roy Mcdonald]

Can you please recommend me a book which described very good the analysis process and the right way to evaluate a property?

Or to refer me to a section in this website where i can learn the analysis process?

Thank you

[Michael Shadow]

At the top of the page it says Search, click on that.

Then type in "deal analysis" in the keywords box

below that click the radio button that says "search for all terms"

Then at the bottom of that page click "Search"

There you will see around 200 topics that go into great details of how to analyze deals.

-Michael

[Roy Mcdonald]

Thank you very much

[Mark McGlothlin]

n57h - Here's another spin on your question. I run a market data analysis company for investors, and we track a great deal of multifamily information including cap rates in a number of markets.

In our database, the average multifamily cap rate for Class A properties is 5.5, Class B 6.6, and Class C 7.5. The range is impressive though - for Class A properties the range is from a low of 3 to a high of 7.8. You'll need to drill down into your markets of interest to find the real numbers.

Make sure you're calculating and using caps based on actual data and not proforma.

Finally, a great book written by a former bank financial analyst that will help with the evaluation of MF projects is "The Complete Guide to Buying and Selling Apartment Buildings" by Steve Berges. He has a great, long chapter in there on financial analysis, and while you won't have your MBA when you're done reading this one, you'll understand the basic metrics.

Have fun- Mark

[Roy Mcdonald]

but as you probably know, you don't learn Real Estate Analysis in the University.

I will buy the book.

Thank you again

[Damien Hall]

n57h,

Last week I purchaed that book redfish suggested by Steve Berges. It is a really good book. It is for the novice investor in apartment buildings but so it covers the basics. It helped me understand the evalution process and what data to get in order to make the analysis.

If you haven't gotten it yet, I strongly suggest you do while you purchase your property. Even though it's not written as a step by step guideline, it does provide me with the necessary direction I was looking for.

Good Luck!

Damien

[Mark McGlothlin]

Damien, glad you agree about the book. I happened to be looking for a copy of it for a friend and noted a bunch of used copies on B&N's website this past weekend. For five bucks or less it's a genuine bargain.

[Paul Gwilliam]

I've got a bit different way of doing it, so take it for what it's worth, but i've found a couple areas (especially right now) that have 8 and 9 cap rates not too difficult to find.

Agents that are familiar with MFH can give you a good Idea of what a good deal in the area is. For example. I don't want to invest in Utah right now, becuase a "great deal" would have around a 7% cap rate. But in Kansas City, or Omaha, an agent may help you find a 8 or 9% fairly easy.

To me, it's all about calling, and talking to the people that make it thier business to be market experts. Not that I don't want to get educated, but to start out, I call the people that are in the trenches.