Cap rate for Multifamily

[Sid Naik]

I am looking to get into Multifamily and based on what I have read it looks like properties with high cap rates is the way to go . however if I am not looking for immediate cashflow , how do you make money in areas like bay area ? does appreciation in property values count for multifamily ? in that case cap rate would have to get lowered for the property price to go up besides rent increase . if we are looking just at rent increase to increase property value with cap rate remaining same then it would not make sense to invest in areas like bay area ? if SFH appreciate i would think even multifamily appreciate without same corresponding increase in rent but with cap rate going down ? For example we have seen condo price increase 3x in bay area over the last 7 years in some areas but rent increase has not been 3x . so multifamily would never give me the kind of appreciation of buying individual units or SFH where pricing is based of rents ?

[Jeffrey Isenberg]

@Sid Naik Cap Rates should also be viewed as an expression of risk based on the types of properties you can buy.  Within any given market, the lesser the area, the higher the Cap Rate.   

I am a big proponent of buy and hold in appreciating markets such as LA.  The appropriate use of leveraged appreciation will allow you to build a larger portfolio over the long run that you can cash flow off of instead of chasing yield.  Also the strong upside in rents in these markets will give you increased cash flow that is completely ignored by focusing only on cap rates. 

So the take away here is that appreciation and cap rates move inversely.  The challenge, however, for many investors is the cost of entry.