CAP Rates and Multifamily investing

[Brian Geiger]

What role does CAP Rates play in Multifamily investing when it pertains to evaluating properties?

I heard from other investors that CAP rates are used for market sentiment and that Cash on Cash, Equity Multiple and IRR is what matters.

Other investors are saying CAP Rates are used to determine the purchase price and NOI.

Which is right?

Thanks for reading and assisting with this.

[Taylor L.]

Others have provided the definition of cap rate. I believe it's an overblown metric, and one of the most common ways newbies out themselves. Because they call up a broker and say they want "xyz type of property at 10 cap or higher."

Other important metrics to focus on are Debt Service Coverage Ratio, IRR, and Cash on Cash return.

One of the assumptions you make when underwriting is your exit cap rate, and those will impact your projected results. We assume cap rates will be higher when we sell, partly because they're already low and partly because falling cap rates can make up for a lot of mistakes. A common practice is to assume cap rate decompression of, say, 25 or 50 bps per year.