future interest rate increase would reduce multi-unit price?

[John Tan]

I wonder if future rate increases would decrease multi-unit price?

Since multi-units are priced based on CAP rates, they will be interest rate sensitive. Ie buying a multi-unit at 10% CAP makes sense in a 3% treasury-rate environment, but what if treasury goes to 8% in the future? I assume the CAP rate of the multi-units would need to increase to keep up. So unless rent jumps to, does that mean the price of the multi-units would need to decrease?

Let's say an apartment complex costs 100K and generates 10K in cash flow, assumes now market demands 15% CAP rate, and a rent increase of 20%. Even with now 12K cash flow, the unit is worth now 80K and a drop in price of 20%? So would it be wise to wait to buy multi-units? Especially given the market for them seems pretty hot? Any intelligent and analytical response would be much appreciated!