Current Market Multi-Family Valuations

[Jason V.]

A great thread about the future of Cap Rates got me thinking: have valuations of MFRs always been as....sketchy as they are right now? And I hesitate to use that word, because it has been, and always will be, Caveat Emptor, but some of the things I see happening (even as a total beginner in the commercial MFR space) just seem silly to me.

For example: a (overpriced) 16 unit near me is currently being advertised for $900,000, driven by a 7.54% Cap Rate (which sends me running in the other direction, because I know this area.)

Here's where it gets 'sketchy' to me: this property is being advertised using an NOI that assumes 100% occupancy, and completely unrealistic expenses for a 16 unit building in this area - and that's without even getting too deep into the numbers. Even if everything else looked awesome on this deal, buying it anywhere near this price would result in the property taxes almost doubling (based on how/when our area asses and what it's currently assessed at - and we have some of the highest rates in the country here!)  

In addition to that (and I know Cap Ex. doesn't factor into NOI) I don't think this property has seen any major repairs/replacements since it was built new 20ish years ago. It looks like it needs a roof, I'm sure HVAC is going to need replacement soon, parking lots are hammered, siding is faded, etc., etc.

So is this just someone trying to capitalize on how hot the current MFR market is? Or someone who's just putting it out there at a high price and hoping someone bites?

In the larger sense, I would like to know who the heck is buying anything in my area at a 7.5% Cap Rate - this isn't a strong area, and I absolutely would not count on future rent growth or any significant appreciation.

[Chris Soignier]

Jason, I can't opine on the cap rate since real estate markets are local, but I'll tell you that investors would be jumping all over each other for that kind of (legitimate) cap rate in a DFW C or better class property.

You should never rely on a seller's or broker's proforma P&L - make your own estimates, and come up w/ your own P & L and rehab estimates.