How to make low cap rate make sense

[Christopher Pray]

How are successful investors making low cap rate apartment buildings make sense in more expensive markets? What factors are there to consider? I'm just looking to get more information as I plan my next steps in my real estate investing journey.

[Evan Polaski]

"low cap rate" and "successful investors" are both next to meaningless.

What is low cap rate to you?

More broadly, it all depends.  As Charles noted, some people are effectively land-banking deals.  They will pay a 3% going in cap rate in prime coastal market because they believe it will always stay full, be low effort, and the underlying land will ultimately appreciate faster than the building and cash flow anyways.  

Similarly, there are people who pay cash on deals, and just want the diversification and safety play that can come with real estate.  They don't need positive leverage, and they aren't looking for some home run returns.

There are syndicators that are paying effectively any price that backs into a marketable return to their LPs, so the syndicator can make their acquisition fee.

There are groups that will "overpay" for a deal that is adjacent to other assets they own, simply for the operational efficiencies and being able to control a specific area.

But at the end of the day, I would say, it doesn't really matter.  You need to assess your own deals, offer what they are worth to you, and know that many will go to someone willing to pay more, but some will be awarded to you and then you execute your plan.