Cap Rate Conundrum

[Brian Plajer]

Hello,

  I have listened to hundreds of podcasts, read several books and attended a workshop regarding the process of apartment building investing/syndication. I still struggle, when underwriting,  what to use as a valid cap rate when trying to determine value.  I understand I can call and ask brokers but that seems so subjective and I will get different numbers. Am I dwelling on this too much?  How do you handle this when you are underwriting your deals? 

[Gino Barbaro]

@Brian Plajer

Cap Rates are the Holy Grail of investing. If you look up the defintion, you get multiple answers. The problem with using cap rates in a seller's market is that most deals are being sold as value adds, so cap rates are going to be low.

You need to understand what your pro forma NOI looks like once your deal is stabilized. Your pro forma, not the brokers.

I use this formula to underwrite deals where cap rates are difficult to use.

Stabilized NOI/Purchase Price + Cap Ex. If the cap rate is higher that the cap rate of the market, then I would consider this deal.

Hope that helps

Gino