Cap Rate on Multi-Family Property

[Mark Gliebe]

What is a good cap rate on a 20 unit apartment complex close to 2 universities in a highly desirable and rentable area in Nashville, TN?  Is 6% low, 8% average and 10% high?  Forgive my ignorance but what is that based on, yearly gross rent?  More specifically, at 20 units and they each rent for $1500/mo, that is $30,000 total monthly and multiplied by 12 equals $360,000/yr gross rent.  Is $4 mil purchase price at a 9% cap rate good?  Being in one of the most desirable neighborhoods and rental areas of the city, how low could you go on cap rate or said a different way how high could you go purchase price?  

[Onaje Barnes]

@Mark Gliebe

1. Cap rates are basically a measure of what the market value is for a property .. people use them to compare commercial properties mainly bc they are rarely similar . eX you can compare a 12 plex vs a 30 unit.

2. Specifically Cap rates are defined as the Net Operating income / price of the asset .

3. So it's really important to understand NOI ... NOI is gross rents minus total expenditures ( not including debt service ) ... NOI is the number that you want to care about MOST ... with MFH it's important to understand all of the costs .. like water bills , electric bills , maintenance, tax bills, trash service etc . Once the NOI is properly calculated and most importantly, Verifiable then you can think about Cap rates/ price.

4. Lastly you need to think about how the property will be purchased .. Ex. Cash, financed , how much down , what terms .. etc that will dictate what you can afford cap rate wise.