Reasonable cap rate in Austin, TX

[Bruce Myers]

We are looking at a small multi in Austin, TX (centrally located), and the cap rate based on the asking price seems ridiculous (basically, the place seems overpriced by a factor of 2 based on what I think a reasonable return should be). I know that the Austin market is hot, so there is some speculation involved in the valuation. That said, what is a reasonable cap rate for a small multi (6 units) in a very desirable location? Because I don't have any of the detailed numbers yet, I'm using the 50% rule to estimate NOI (basically taking 50% of reported gross rents as NOI and dividing by asking price for cap rate) and I'm getting something like 4%. Does that seem crazy to anyone else, or am I doing something wrong?

FYI, just so I don't appear too crazy to even be considering this, we have plans for this place that will increase the actual income by at least double, but I still don't want to overpay based on the market.

[Account Closed]

NOI is not calculated by using the 50% rule. If you don't understand what operating expenses or cap rates are you should not be using them. Why not use something like GRM's that are easier to calculate and understand and actually more appropriate for this type of property?