high cap rate investment

[Blondell Chism]

We are looking for purchasing a multifamily property in the greater Sacramento area and sometimes the listing states "could be" a high cap rate investment. We are wondering what might make the listing agent state this and yet on the tour there was not a red flag. What makes a duplex a high cap rate investment. By the way, one unit is already rented for the year. 

[Immanuel Sibero]

@Blondell Chism

It's a marketing gimmick. Many investors wrongly look for "high" cap rates so saying high cap rate would attract attention. Cap rate is irrelevant in single family houses, duplexes, triplexes and fourplexes. Even in commercial multifamily properties (5 unit and more), cap rate is used as a valuation metric so investors in this space should not be chasing cap rate either. You should do your own underwriting using industry standard/best practice metrics such as COC, IRR, Equity Multiples, Payback in years, etc.

Cheers... Immanuel

[Russell Brazil]

They likely just mean that there is upside on the rents.

[Scott Scoville]

Quote from @Blondell Chism:

We are looking for purchasing a multifamily property in the greater Sacramento area and sometimes the listing states "could be" a high cap rate investment. We are wondering what might make the listing agent state this and yet on the tour there was not a red flag. What makes a duplex a high cap rate investment. By the way, one unit is already rented for the year. 

Hey Blondell! Small multi family is typically valued by comparable properties, like your typical single family residential property. The key to small multifamily is looking at current rents vs. potential market rent, rent appreciation, location, current value vs. ARV, vacancy rates, etc. Cap rates can often be an over simplification and are typically used for larger apartment buildings / complexes. I'm an investor and agent and have bought and sold many small multi family properties. I'd be happy to jump on a call and discuss this further if you'd like.