I am just starting my real estate investment journey. I am attracted to small multi-family investments with the intention of expanding into apartments. Starting off, should I be concerned about Cap Rates? How important is cap rate to small multifamily investment and why is it important? I am not fully understanding this concept. Thank you for any replies.
Cap Rate for multi-family is basically an expected rate of return for any particular property that has no debt on it. It's a measurement to rank or to compare income producing properties. It's a measurement to analysis properties but it's NOT THE ONLY thing you should be comparing. For mulit-family you can't go out and grab comps for a 12 unit apartment. For SFH you can so it's a little easier.
@David Denelsbeck The short answer is no. You should be more concerned with cash flow for 1-4 family.
Cap rate is a valuation metric generally used in commercial properties. Cap rate is NOT a measure of expected return or performance. This is a common misconception that's been hashed, rehashed, blogged and reblogged. If you wish to learn more, simply do a search on "cap rate" right here on BP.
Some of the more useful metrics to analyze residential real estate (i.e. SFRs, duplexes, triplexes, and fourplexes) are rent-to-value ratio, Cash on Cash, breakeven analysis such as debt service ratio, equity multiples, IRR.