Understanding the dichotomy between Cap Rates and IRR in MF

[Matthew Metros]

To preface this email - I found a deal that resulted in a return of 8% over 5 years with a 2% rent increases YOY. 

My partner responded - 

"Might as well invest your money in the stock market and make 8% in a few days…Or go buy in Ohio, where the return is much higher.

Doesn’t make sense to invest at 8%, for me at least."

Overall the theme is that during the quick analysis, we found that rents are already at the market. If there’s no room for rental growth, then returns are not high enough for the deal to make sense.

So my follow up question is how do multifamily investors include asset appreciation in their returns.

If my thesis is that overall the San Antonio market is going to receive asset appreciation greater than the rents over x amount of years, how does my underwriting process change?

I ask because the cap rate is based on cash flow, while other investors seek ROI Based on the appreciation.

I understand that multi-family valuations are derived from cash flow. But what I want to understand is the dichotomy between the cap rate and IRR. IRR will include the cap rate PLUS the asset appreciation PLUS the leverage going into the deal.

So why do multifamily investors just focus on cap rate when IRR is clearly a more confident figure for your return?

I will admit that my question is largely due to my inexperience in the field. I am really trying to understand this.