Cap Rates

[Tyler Carpenter]

What cap rate do all of you investors look for when buying multi units? Im curious if you base different cap rates on certain amounts units compared to that of other another building with a different amount of units. It seem to be that lower the cap rate the more the cost. What is a good happy medium?

[David Beard]

Pretty open-ended. You really need to look into the A/B/C/D gradations of MF properties, which are sort of like credit ratings on bonds and determine the risk of the property. The risk will be based on desirability and convenience of location, and age/condition/attractiveness of structures. The market's perception of whether the general area will grow, shrink, or stay flat over time will determine if investors feel that a capital appreciation/depreciation component should be buillt in as well.

I'm sure folks on here can give you their general cap rate guidelines for each quality tier. I might suggest:

A - 6-8%
B - 8-10
C - 10-15
D - 15+

You do need to be watchful of clustering of many distressed/criminalized MFs in an area, which happens often in urban areas as criminal activity and unemployment leads to vacancies which leads to broke landlords who can't fix their distressed units, so more people leave that area, and it just spirals down from there.