Cap rates in determining MF property value

[Olu Efunwoye]

I understand the concept of the Cap rate as a factor in the asking price and NOI. But I still need to understand how the cap rate can be justifiably fair. How can I safely put a cap rate just based on my asking price and NOI?

I understand the equation for asking for the price is NOI/cap rate. While NOI is a given number that can be derived easily, how is the cap rate derived? I have seen some rely on cap rates based on community/area, but how safe is that for both the buyer and the seller in agreeing on the sale price? What is the function of age, structural defects, community, population, etc. on the cap rate?

[Bradley Buxton]

@Olu Efunwoye

Cap rate is just one metric to compare a property and determine value. It's like only using weight to compare fitness levels. A 200lb professional athlete is going to be more fit than an 200lb desk worker that eats fast food every meal.  Look at cap rate and look at comps in the area. What would the exit strategy return be? Can you raise rents to improve the cap rate and then sell? What are your cap ex costs to get the property up to or above market rents.  Are rents growing in the area?  If you are trying to determine a purchase price there are factors important to the sellers and knowing those can help you get the best price. In my market in Reno, NV the multifamily prices are all over the place and there are deals but there are also so pricy properties that have an average cap rate but there would not be much value left on an exit in the next 3-5 years.  Look at all factors of the deal and not only the cap rate.