Cap rate in laymen's terms
When looking at multifamily properties for sale, it's typical to see an advertised cap rate. Where does this cap rate come from! Who determines what it should be? As an owner myself, I know what my NOI is and I could divide that by whatever cap rate and come up with market value? It seems like I'm missing something here? The value of my property goes up if the cap rate goes down, so what determines how low of a cap rate makes sense? My basis for all of this is trying to determine my equity in this property for borrowing, credit lines, etc.
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Cap rates are severely over estimated in most cases from brokers/sellers/syndicators. When I look for deals I don't really pay attention to it because expenses are always left out or income is inflated. Those top of the line items are again always manipulated and can throw the calculated cap +/-3.0. The only true way to determine is to get the trailing 12 month Profit and Loss Statement but at that point you have the information to underwrite it fully.On class B/C I have been using 6.5-7.5% reversion cap depending on market. For example 6.5 in Dallas whereas 7.5 in Gulfport MS.These days nothing is over 7.5% cap (unless its a truly off-market deal and a fringe deal under 60-units). I find the current prevailing caps from my friends who are apartment operators and ping them what they used on their last deal. Another way is to talk to a broker who has their pulse on the market and knows you need the number for underwriting purposes (and he is not selling you a deal).