How to determine market cap rates

Question

Hello BP! I have a question that I'm sure is as newby as it gets. I found a six plex in n the Phoenix az metro area, called the owners, had the current income and expenses emailed to me and began to do the numbers to determine the value of the property. My preferred method I think is using ROI and cap rate, but I can't figure out the cap rate I should use to determine that. The cap rate for THIS property at their asking price is 5.3. The cap rates of other properties currently for sale in the area seem to average about 7.1, but I don't know where to find data on SOLD multi-family properties online more recent than 2014 or how to narrow down the data to the parameters of the property I'm looking at. Your guidance is appreciated!

Brent Coombs · Answer

@Dovid Staples, no need to determine market cap rate!

You only need to determine what cap rate YOU would be happy with!

Your MAO then becomes the amount that will give you that cap rate! Simple.

(But don't even offer THAT much if you can get it by offering less).

And if you can't get YOUR cap rate there, find somewhere where you CAN! Cheers...

Anthony Chara · Answer

Hi @Dovid Staples, first off, above you used ROI and Cap Rate to determine your value. Do you mean NOI & CR?

To find the Cap Rate for your market you can ask some Commercial RE Brokers in your area what they're seeing for similar properties. You can also reach out to some commercial appraisers. I believe Marcus and Millichap and perhaps CBRE have some reports on their websites that might help you. Lastly, you can pay for sold reports on Loopnet.com to see what similar complexes in that area have sold for in the last few years.

Jason Bilbrey · Answer

Ok, so this is bringing up an old thread, but I'm interested in understanding the different perspectives here as I try to make a transition from small multifamily (4 or less units) to commercial multifamily (5+ units). Some people like @Michael Blank suggest that you use the market cap rate to compare to the a particular listing's offer. Other people are adamant to complete ignore cap rates and look at cash flow or 5 year IRR, etc.

Ultimately you do have to look at the numbers, but it seems like knowing the cap rate of a particular property compared to market cap rate can be an effective tool to understand if the asking price is right or if an adjustment is needed to get it in line with market pricing.

Thoughts?

Brent Coombs · Answer

Bob, Bob, Bob... (your shot across the go-for-higher-cap-rate starboard bow missed)!

Account Closed · Answer

Why on Earth are you shopping for cap rates?

Dovid Staples · Answer

ok so it seems like on one hand I decide what cap rate I want (which I do), yet it's the current market that determines what a reasonable cap rate to demand is (which I'm trying to figure out). In which case I can simply reach out to awesome folks like Tim Weisser ha I knew it came down to something super simple. Thank you guys for your feedback!

Michael Lee · Answer

Hello and welcome to BP! I think Dovid Taples has it right, the market of the location determines what is a good return. The market that it is in should have your familiarity in it.   Take the time to get to know the market before you start investing in it.  You have got to get cash flow from whatever you invest in. Good luck!

Tim Winter · Answer

I'd agree with and @Brent Coombs and @Anthony Chara. Cap rate is determined by the market, so if you don't know your market, ask someone that is. Brokers, appraisers or if you have a good data source online. But in the end, its what you want to make as a return as an investor. The higher the rate, the more challenging your deal finding will be. Take tax lien investments, you have to know your target before going in, to valuate what offer and return you're willing to stomach.

As for Phoenix area, @Dovid Staples it depends on the location and class of MF. if you message me, I can let you know what that area is going for.

Dovid Staples · Answer

@Anthony chara yes I meant NOI. Thank you for the info!

How to determine market cap rates

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