Does More Units = Smaller Cap Rate?

[Jonathan Johnson]

Hello BP,

I was wondering when looking at larger apartment buildings and neighborhoods, when you get to 100+ units does the cap rate go down? I just looked at a 200+ unit apartment area for sale with a 7.5% cap rate, but I don't know if that's good. Obviously there's a lot of factors to consider, but these apartments are 96% occupied and are in pretty great condition in a B neighborhood.

[Joe Hughis]

@Jonathan Johnson - Location dictates price. The more "attractive" the location, the higher the market price the property will command and the lower the cap rate will be, regardless of NOI. After all, when you are first going into a property, it's income and expenses are relatively set.

That being said, if in that location properties are selling at a 5% cap and you found one that legitimately offered you 7.5% cap then you found a great deal for that location.  Some real estate investors are strictly cap buyers and would rarely considers a property's location in determining a property's worth to them.  However, other's will take into consideration the strength of a property's value and potential to increase in value (among many other factors) as compensating factors to a accepting a lower cap.  This strategy can be part of an investors greater portfolio diversification.

But to answer you last question, it is about what your ultimate plan, strategy, and investment style are.