What cap rate do you all look for when investing in a duplex or multi-plex property?

Question

I am considering investing in a duplex in Colorado Springs, CO and/or Austin, Texas.  Colorado Springs property tax seems ridiculously low compared to Austin and its surrounding areas.  I was even looking at 4 unit multiplex in Oakland, CA since I'm from the Bay Area so I can easily manage it myself but that place is such a mess.  What cap rate do you all look for when looking at duplex's or multi-plex's?  If you all have a CORE 4 to recommend in these areas please let me kThanks in advance

Jordan Moorhead · Answer

Cap rates are not applicable to residential property imo. A cap rate is independent of debt and assumes you have accurate expenses which you'll almost never find on residential property. When analyzing any property commercial or residential the only thing that matters to me is the cash on cash return and cash flow. Who cares what the cap rate is unless it makes you a good return!

Brian Bohrer · Answer

Hey @Sam P.,

Cap rates will vary depending on the type and location of the investment you are looking at here in Colorado Springs.  With the unknowns in the direction of interest rates and changes in landlord/tenant laws we are seeing cap rates fluctuate as of late.  I am a firm believer that Colorado Springs is a great place to invest due to its strong economy, temperate climate, beautiful views and easy access to outdoor activities.

The market is starting to show signs of being depressed, meaning that there will be more opportunities for investors to find some great deals.  A recent economic report by Tatiana Bailey stated that over 10,000 new residents flow into El Paso County every year which is constantly driving up demand in the area.  I see the next couple of years as a great time to get into this historically resilient market!

If you are looking for a great core4 in the area, I would love to assist you as a knowledgeable local agent and I can also help you find the other members of your team if need be.

Either place you decide to invest, I truly wish you the best!

Take Care and good luck Sam,

Brian Bohrer - Realtor

Gino Barbaro · Answer

@Sam P.

When looking at a smaller multifamily, I would focus on bedrooms, and not cap rate. The more bedrooms per unit, the more unit you will be able to generate. It's going to be based more on a sales comp. If the place is such a mess, do you want to own an asset in that area, even if it is in your back yard.. Experience has taught me these areas are challenging to manage, and appreciation is harder to come by

Gino

Obed Calixte · Answer

@Joshua Christensen hit it on the head.

Even if CAP rate were meaningful for residential property, what do you intend to do with that information.

Figure what the most important factors are to you from purchasing an asset.

Joshua Christensen · Answer

Absolutely, CAP is based off NOI and to @Jordan Moorheads point, most sellers of small MF and residential deals don't keep good numbers.  Besides the fact that valuation is based off sales comps not income.

I look more for positive cash flow.  What is the DSCR on the deal?  Is it north of 1.25?  You may be ok.  The higher you are on your DSCR number, the better the deal.

These smaller deals are much easier to estimate numbers and look at as there are not as many moving parts.

Russell Brazil · Answer

Whatever the prevailing cap rate in the location is. In my market it's 3.5-4%.

Bradley Buxton · Answer

@Sam P.

What is your goal for your investments? That will help guide your decision. Those are all different markets with different dynamics. You'd be able to find a core four in all the areas.  If you're already living in CO it will be easier to manage. Oakland will vary block by block and CA has very pro-tenant laws. Texas has high property taxes and the vacancy rates are increasing in Austin. Have you considered something in Nevada? Low property taxes, landlord-friendly, and similar price points to those other markets with a strong potential for appreciation.

Tanner Pile · Answer

@Sam P.

As many have said Cap rate is not typically used for small multi family... However, for commercial properties in Colorado Springs it is common to see deals trade at a 5% cap rate. For multi-family going as a long term rental it will be hard to make cash flow unless doing a serious amount of down payment or getting a great interest rate. Furnished rentals and STRs can cash flow here but take more time to find the right property for permits.

Getting a couple hundred in cash flow for a LTR would be a good deal in Colorado since we are an appreciation based market.

Alecia Loveless · Answer

@Jordan Moorhead Agree that CAP rate doesn’t apply to duplexes.

Sam P. · Answer

Is that after all expenses?  Are those units cash flowing and you are banking on appreciation also? I am not sure if the markets I am interested in will have any appreciation.

What cap rate do you all look for when investing in a duplex or multi-plex property?

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