Real Estate Agent · Member since 2019 · 167 posts · 72 votes
What is a good cap rate on a 20 unit apartment complex close to 2 universities in a highly desirable and rentable area in Nashville, TN? Is 6% low, 8% average and 10% high? Forgive my ignorance but what is that based on, yearly gross rent? More specifically, at 20 units and they each rent for $1500/mo, that is $30,000 total monthly and multiplied by 12 equals $360,000/yr gross rent. Is $4 mil purchase price at a 9% cap rate good? Being in one of the most desirable neighborhoods and rental areas of the city, how low could you go on cap rate or said a different way how high could you go purchase price?
Real Estate Investor · Houston · Member since 2008 · 9 posts · 4 votes
6y
@Mark Gliebe
1. Cap rates are basically a measure of what the market value is for a property .. people use them to compare commercial properties mainly bc they are rarely similar . eX you can compare a 12 plex vs a 30 unit.
2. Specifically Cap rates are defined as the Net Operating income / price of the asset .
3. So it's really important to understand NOI ... NOI is gross rents minus total expenditures ( not including debt service ) ... NOI is the number that you want to care about MOST ... with MFH it's important to understand all of the costs .. like water bills , electric bills , maintenance, tax bills, trash service etc . Once the NOI is properly calculated and most importantly, Verifiable then you can think about Cap rates/ price.
4. Lastly you need to think about how the property will be purchased .. Ex. Cash, financed , how much down , what terms .. etc that will dictate what you can afford cap rate wise.
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
6y
A 9% cap rate would be unbelievable in a good neighborhood. Unfortunately that is not how the cap rate is calculated. It uses the NOI and not total income. So using a rough guess of 50% operating expense, you're left with $180k NOI and a 4.5% cap rate. Is that good? You have to decide. Is that the prevailing market cap rate? Check with a local broker.
Real Estate Investor · Houston · Member since 2008 · 9 posts · 4 votes
6y
@Mark Gliebe
1. Cap rates are basically a measure of what the market value is for a property .. people use them to compare commercial properties mainly bc they are rarely similar . eX you can compare a 12 plex vs a 30 unit.
2. Specifically Cap rates are defined as the Net Operating income / price of the asset .
3. So it's really important to understand NOI ... NOI is gross rents minus total expenditures ( not including debt service ) ... NOI is the number that you want to care about MOST ... with MFH it's important to understand all of the costs .. like water bills , electric bills , maintenance, tax bills, trash service etc . Once the NOI is properly calculated and most importantly, Verifiable then you can think about Cap rates/ price.
4. Lastly you need to think about how the property will be purchased .. Ex. Cash, financed , how much down , what terms .. etc that will dictate what you can afford cap rate wise.
Rental Property Investor · Annapolis, MD · Member since 2011 · 232 posts · 170 votes
6y
Hi @Mark Gliebe Both @Michael Le and @Onaje Barnes gave good responses. I would also suggest you speak with your property manager to get their take on current market cap rates. In todays market I would be concerned with anything above 7 or 8% cap. Not to say they are not out there and can't work but it is likely not in a great area and will need serious attention.
Investor · New York & TN · Member since 2019 · 325 posts · 219 votes
6y
All good responses, in Nashville, I'm thinking @Michael Le is pretty much on target. The property is most likely a 4.5% cap rate.
A higher cap rate seems better than a lower one (obviosuly) but it doesn't always mean it's the best investment. Low cap rates means a strong market and potential to increase in value at a faster pace.
I like to think of it as this: either you make more money on a monthly basis (higher cap rate) or you make money thru appreciation or longer term in better markets which means lower cap rates. But as @Onaje Barnes mentions in point #4 - financing can be a problem if cap rates are too low.
Real Estate Agent · Member since 2019 · 167 posts · 72 votes
6y
@Michael Le thank you for your input and education. I have a few commercial brokers I know, so I will ask them those specifics.
@Onaje Barnes thank you for your education on calculating those costs and rates. Very informative info.
@Matt Nusbaum when you say concerned with anything above 7 or 8%, do you mean 9-10% cap rates are not ideal properties or not in great areas. Forgive my ignorance, could you elaborate on that?
@Peter Nikic thank you, I will check and see from some brokers if that is accurate for Nashville. Does age of building have an effect on the cap rate? It's pretty much college housing in an older building in the best rental and one of the most affluent areas in Nashville.
Real Estate Investor · Houston · Member since 2008 · 9 posts · 4 votes
6y
Age of the property typically indicates what class it will fall in .. A-C ... which in the past would have been an indicator of the cap rate ...BUT the market is very HOT in MFH ( probably at a bubble level ) ... so everything is trading at low cap rates ( old and new buildings).
@Michael Le thank you for your input and education. I have a few commercial brokers I know, so I will ask them those specifics.
@Onaje Barnes thank you for your education on calculating those costs and rates. Very informative info.
@Matt Nusbaum when you say concerned with anything above 7 or 8%, do you mean 9-10% cap rates are not ideal properties or not in great areas. Forgive my ignorance, could you elaborate on that?
@Peter Nikic thank you, I will check and see from some brokers if that is accurate for Nashville. Does age of building have an effect on the cap rate? It's pretty much college housing in an older building in the best rental and one of the most affluent areas in Nashville.
I think what Matt is saying in terms of concern is anyone advertising a 9 - 10 cap is probably blowing smoke. A deal like that isn't realistic in the area you are talking about
Real Estate Agent · Member since 2019 · 167 posts · 72 votes
6y
@Luka Milicevic thank you for the breakdown, especially by areas and counties. Yes this is near the Belmont/Vandy area. Forgive my ignorance, I was spitballing the 8-10% based on gross net, not NOI. I was wrong, but if adjusted for NOI, half of 8-10% would be 4-5% which is what you were referencing. Overall thank you for clarifying and clearing that up.
Las Vegas, NV · Member since 2016 · 62 posts · 28 votes
6y
@Mark Gliebe
Hey mark, I think it’s great you’re out there looking at deals, and you’re on here seeking more information. I’m not sure if you’re currently looking to buy, if so I’d suggest you continue learning some more, maybe partner up with some local Multifamily investors, and make sure you have an idea what you’re getting yourself in for. Apartment investing can be a ruthless business, and people will have no problem selling you a junk property.
Also Cap rate is always calculated using NOI, never using gross rents.
And calculating NOI is an art form in itself. And this is a different conversation entirely.
If you’re working with a good broker, they should know what the cap rate is for that area and for that asset class.
You can also use PM’s and ask local investors to find out what the cap rate is.
Investor · Chicago · Member since 2018 · 113 posts · 51 votes
6y
I didn't read through all the posts, so I'm not sure if this was mentioned, but cap rate is also a measure of stability. Though I can't say for sure about residential, in commercial if you have a 10% cap rate, some people may see this as risky. For example, if you look in downtown Chicago, a stable area, you're likely to find cap rates between 3.5-5% on most properties.
What is the age/condition of the property? The Vandy/Belmont area is a great spot, but some of those complexes are more than 100 years old. Additionally, I would say that 200k per unit is probably on the lower side for acquiring units in that submarket.
Rental Property Investor · Killeen, TX · Member since 2017 · 337 posts · 100 votes
6y
@Onaje Barnes @p@Peter Nikic @Michael Le
Thank you for simplifying Cap rates and how it's applied. I've done a lot of research on it yet no one could define it as simple as that.
If I could trouble you just a moment. Would you mind checking my logic if I understood correctly? So if I were trying to determine a Commercial RE's current value, I would need an accurate NOI (rent roll, utilities, etc.) divided by the current Cap rates (from a broker or PM)? At least for a preliminary analysis, of course.
Thank you for simplifying Cap rates and how it's applied. I've done a lot of research on it yet no one could define it as simple as that.
If I could trouble you just a moment. Would you mind checking my logic if I understood correctly? So if I were trying to determine a Commercial RE's current value, I would need an accurate NOI (rent roll, utilities, etc.) divided by the current Cap rates (from a broker or PM)? At least for a preliminary analysis, of course.
That is correct with the caveat that current value is not necessarily what people will pay for it, if that makes any sense. It's the current value if you don't plan to make any changes to the property or how it is currently operated. If there is opportunity to improve on both then many people will pay for that potential. Basic example is if you have an empty building with zero NOI, that does not mean that building has zero value. Even if you leased it up to 50% occupancy it is generating much more income, so the value is basically what someone is willing to pre-pay now for the work they will eventually have to do to later to get it occupied and operating better.
Rental Property Investor · Killeen, TX · Member since 2017 · 337 posts · 100 votes
6y
@Michael Le thank you for your response. You read my mind because I'm actually trying to figure out if I'm overpaying or low balling with my offer. However you lost me a little bit with your explanation.
The way I understand what you said is.. Let's say I found an under performing property where I know I can add value by reno, raising rents, minimizing expenses, etc., I will be basing my asking price for what it's potential value will be after I'm done fixing it up?
Forgive my ignorance. I really am new to evaluating commercial properties.
@Michael Le thank you for your response. You read my mind because I'm actually trying to figure out if I'm overpaying or low balling with my offer. However you lost me a little bit with your explanation.
The way I understand what you said is.. Let's say I found an under performing property where I know I can add value by reno, raising rents, minimizing expenses, etc., I will be basing my asking price for what it's potential value will be after I'm done fixing it up?
Forgive my ignorance. I really am new to evaluating commercial properties.
To an extent you will be paying for the potential. That's just the reality of this tight Seller's market. How much of that potential (that you will have to work hard to execute) will you be willing to give up now to the Seller is up to you. But in this current market you won't likely win any deal paying for exactly how the property is currently operating.