Average cap rate for a D class neighborhood

[James Rodgers]

Who can tell me what the typical cap rate is in a D class neighborhood? Making an offer on an eight unit apartment complex, fully occupied in good condition.

You can definitely tell me what is the best and worst you've seen, but I want to know the average.

James

[Wilson Lee]

 Hi James, I am Lee Wilson a local investor. 

This year in the month of March, I was looking at a class D apartment with 5 units.   Past Apartments sold, at that time,  averaged about a 10% to 12% Cap.  Yet, I don't know the condition of the buildings or other factors.   In regards to the 5 unit building I was looking at, The owner asked for a 8% cap rate.  He claimed there was no need for repairs and no deferred maintenance.   We found rotting floor joist, a mold problem, and some risky tenants He did not want to recognize the risk we where exposed too and the deal fell apart.

My misstate was agreeing to a low cap rate before starting due diligence with out communicating my intent.  I should have clarified that my agree to the terms where contingent a pawn the condition on any rehab or risky tenants we find.  For example, I consider "NON-section 8 tenants to be higher risk in class D neighborhoods and will ask the terms to be adjusted reflect that added risk."  

But regardless, check what has sold in the area.  Take your best guess as to what the Profit & Loss statement would look like for the sold properties to estimated a starting Cap rate for the market.  Then call up a number of brokers and ask them what they think the market cap is.  Compare the samples to get a guide number.

Best of luck!