Buying multi unit based on cap rate?

3 Replies

Searching for my first multi unit in NY 

Is it a good idea to base my criteria on the cap rate? 

I have some SFH currently and want to add MFH to my portfolio but not sure what to look for . Thanks!

@Marci Stein cap rate is obviously important in multifamily, but the reality is that you will have to do some research to learn how to figure out the actual cap rate versus the one that is advertised. If you see things like "stabilized 10 cap", then you are probably looking at a D class property. I recently looked a broker pro forma in Cicero, IL where a 27 unit with a steam boiler had $3,000 listed for the heating bill. I asked the broker in passing about it after the property sat for a month and he mentioned that the management company had recently taken over so that was not a full year (I already knew a real bill was probably 7-10k per year). 

I would focus instead on finding areas that make sense that are B or C class areas. You want to make sure your tenant pool is strong and that it is easy to fill your units with folks with 600+ credit scores and good jobs. You want to make sure you can find good building stock that makes for easy management (in my area brick, 1950's construction is my favorite). 

2-4 units typically sell based on comparable sales. 5 to 10 units in some places will trade based on either cap rate, comparable sales or price per unit. 10+ will typically be based on cap rate exclusively with some exceptions.