How trustworthy are cap rates

[Andrew Green]

How do you verify if the owner has included all expenditures to calculate their cap rate? Considering a 16 unit for 560k with an 8.04 cap rate. Is this considered a good cap rate?

[Joseph Gozlan]

This is going to be an unpopular statement: Cap rates are over rated!

Why do you care what the cap rate is? So you can compare your deal with someone else's deal?

Everyone has different strategies so one person's 5 cap is another's 10 cap.

I'll explain:

If the seller's brother owns a pest control company and the seller get's it at cost, can you get it at cost?

If the seller has a full time on-site manager in a 16 units building and pay her $100K/year because she happens to be his sister, would you keep her at that pay rate?

When you underwrite a deal you must look at YOUR numbers. The seller's numbers are nice as a reference only but no more than that. If I own a 400 units community across the street from that 16 units I can buy it at a much higher price knowing that my cost of operations will be dramatically lower leveraging the scale I already have across the street. 

Bottom line, look at cash flow and dollar amounts. If YOUR numbers will get you a good cash on cash returns (and good is also subjective) then make the deal. Otherwise, pass on it!