Determining a local market cap rate for small multifamily

Multi-Family and Apartment Investing
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Determining a local market cap rate for small multifamily

Rick BevilacquaPro Member
18901 · Member since 2015 · 43 posts · 12 votes

When you are underwriting a small multifamily deal, for example, 4 to 10 units or more, in a tertiary market with C & B-class properties, what is the best way to determine a safe cap rate for your subject property? My purpose in doing so would be to determine either resale or refi valuation, after Repairs, rehab, or overall repositioning of the property.

Any advice from experienced multi family experts would be much appreciated!

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Ian Stuart
Lender · Seattle, WA · Member since 2017 · 118 posts · 161 votes
7mo
Quote from @Rick Bevilacqua:

@Ian Stuart isn’t that contrary to the whole commercial multifamily logic for valuing properties; Income based rather than comp based?


Rick multifamily investment markets are just that - markets. Markets change and fluctuated based on where buyers and sellers are willing to meet. Sale comps reflect where they are meeting. You need to pull sale comps to accurately value a property in order to determine an appropriate stabilized cap rate, $/door, $/rsqft in conjunction with accurate NOI underwriting.

Every multifamily appraisal has three sections: income approach, sale approach, cost approach. This is where it all comes together re: valuing multifamily assets.

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  • Ian Stuart
    Lender · Seattle, WA · Member since 2017 · 118 posts · 161 votes
    7mo

    Pull sale comps. 

    0Reply
  • Rick BevilacquaPro Member
    OP
    18901 · Member since 2015 · 43 posts · 12 votes
    7mo

    @Ian Stuart isn’t that contrary to the whole commercial multifamily logic for valuing properties; Income based rather than comp based?

    1Reply
    • Ian Stuart
      Lender · Seattle, WA · Member since 2017 · 118 posts · 161 votes
      7mo
      Quote from @Rick Bevilacqua:

      @Ian Stuart isn’t that contrary to the whole commercial multifamily logic for valuing properties; Income based rather than comp based?


      Rick multifamily investment markets are just that - markets. Markets change and fluctuated based on where buyers and sellers are willing to meet. Sale comps reflect where they are meeting. You need to pull sale comps to accurately value a property in order to determine an appropriate stabilized cap rate, $/door, $/rsqft in conjunction with accurate NOI underwriting.

      Every multifamily appraisal has three sections: income approach, sale approach, cost approach. This is where it all comes together re: valuing multifamily assets.

      1Reply
    • Brandon VukelichBusiness Member
      Real Estate Broker · Tacoma, WA: 🏢 27 LTRs 🏡 3 STRs · Member since 2018 · 547 posts · 457 votes
      7mo
      Quote from @Rick Bevilacqua:

      @Ian Stuart isn’t that contrary to the whole commercial multifamily logic for valuing properties; Income based rather than comp based?


      You mentioned 4-10 units. You likely already know this but just to clarify, four and less units are residential and more based on comps. Many refer to "cap" rates for small MF but you can't really force appreciation on <=4 unit properties by improving your NOI like you can on commercial 5+, that's is a different ball game.

      Broker at Multifamily Properties519 Reviews
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  • Frank PyleBusiness Member
    Specialist · USA · Member since 2024 · 279 posts · 130 votes
    7mo

    On small multifamily in a tertiary C and B market I do not try to find the perfect local cap rate first because the numbers people quote are all over the place, I focus on what the place will really net once it is running right and then I see what the value looks like at a couple different cap rates. In Indy you will see the same building type trade way differently just based on block and condition, so when I am thinking refi or resale I assume the exit cap is a little higher than the nicest comp and make sure it still works. Quick check is simple take yearly rent, knock off a vacancy buffer, some money for a manager even if you plan to run it yourself, plus repairs and big ticket items, then subtract taxes and insurance and see what that gives you at say an 8 cap and a 9 cap. If you want one clean next step, share your all in cost, your expected rent per unit after the work, and your taxes and insurance and I will run the quick math with you.

    [email protected]317-501-3467
    Frank Pyle at ExP Realty
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  • Greg Kasmer
    Rental Property Investor · Philadelphia, PA · Member since 2021 · 776 posts · 503 votes
    5mo
    Quote from @Romina Gonzalez:

    Great breakdown! So once you've repositioned the property, how do you actually figure out what rents you can realistically charge after the work is done? That part seems like it could make or break the whole exit valuation.


     Romina - I typically use rentometer.com for rent comps in the area, but also look at active rentals on Zillow and Apartments.com. If all else fails you can call local buildings to see what they are renting for. Good Luck!

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