Identifying MARKET CAP RATE

[Carlos Casanueva]

Where can we get the going cap rate in an area? Some areas multifamily properties are selling for 8 cap, while somewhere else may just be around a 5.... how do we know what the market cap rate is in any given market??

[Bill Gulley]

Question is, why are you trying to buy based on the existing or past owner's CAP rate??????

About the most important aspect of what a CAP rate might be in a local area will be that as the opinion of local appraisers, not really from Realtors.

The appraiser's opinion is a shot in the dark, they won't admit it, but they have no clue as to what different owners actual numbers are. The appraiser looks at the sale period, trying to find that rate which most investors seek given similar properties carrying similar risk assumptions. In other words it's a guess.

There are several sources of data, but in real estate, unless actual owners are contributing to data, then it will be compiled by survey, or by third party observations like Realtors. What's the real margin of error? Could be 2%!

A better source of information would be to ask CPA's (accountants) what they have found with their clients, ask them what should be expected.

Your cap will never be the same as a previous owner's on the same property, much less the norm of all investors in similar properties. Just about all the variables, vacancy, maintenance, repairs, your tax liabilities, rent levels won't be the same at the end of a year. A CAP rate is a historical performance ration, often misused as a forecasting tool.

Examine your Cash on Cash, based on your financing and cost projections with your pro forma income, keeping all things as equal as you can between each property analysis selecting the best opportunity is a much better approach. Good luck :)