Evaluating Cap Rate on a 4plex

[Alex Hymanson]

Hi all - found an off-market deal and wanted your help in determining an appropriate offer.  The property is a 4plex and comps are hard to come by in this area, so would like to understand the typical Cap Rate in the current interest rate environment so I can begin negotiating.

The 4plex is in Tyler, TX which is about 100 miles east of Dallas.  It's a C+/B- class property.  Each unit is a 2/2 and 1000 sq ft.  1 of the units is fully updated, 1 of the units is partially updated and the other 2 units need to be updated.  They are all currently rented.

Let me know if you need additional information to help.  Thank you in advance!

[Greg Scott]

Cap rate is irrelevant to a 4plex.  Cap rates are used in commercial real estate to understand value which is critical relative to the financing.

For a 4plex financing is dependent on comps.  Having a hard time finding comps means the seller is going to have a hard time finding a buyer because the banks aren't going to want to finance it.  If you buy the property, you get to inherit that same problem when you go to sell in the future. 

If you have all cash, you can pay whatever you negotiate.  However, if you have all cash, Cap Rates again become meaningless because you should be able to get a much better deal on property that is not financeable than a Cap Rate on a 6 unit apartment complex which can be financed.  If you pay the same Cap Rate as the 6 unit, you have surely overpaid.