Understanding cap rates

[Nick D.]

I am looking to switch from SFH to multi family and don’t understand cap rates Do you want a higher or lower cap rate? And how are cap rates typically used in the multi family side of underwriting Thanks

[John Warren]

@Nick D. you want to buy higher cap rates because that means the purchase prices are cheaper. Cap rates have an inverse relationship to purchase price. The lower the cap rate, the higher the price. The higher the cap rate, the lower the price. 

Most markets have a "normal" cap rate. In my market here in the Chicago suburbs, the normal in most working class areas is probably 7 percent currently. In "A" areas I am seeing cap rates of 4 and 5 percent, which means there is very little meat left on the deal for the new buyer. 

Here is an article I wrote a while back about cap rates. http://jwarrenbroker.com/blog?post=The-Capitalizat...