Improving Asset Class to Reduce Cap Rate

[Shane Crockett]

I’m getting into MF investing and wanted to obtain feedback in regards to cap rates, specifically on how to improve (lower) them from the time you buy to the time you sell a property.

My fear is that if I purchase a B/C grade asset and put money into it for value add, but can only find buyers willing to negotiate a cap rate that kills all my equity, I’ve basically wasted a lot of time, energy, and money just to break even or perhaps worse.

What are the keys to avoid this from happening, and how should I be looking for the right properties to purchase so I don’t end up in this situation?

[Greg Scott]

I wouldn't focus on Cap Rate.  It is set by the market and therefore largely out of your control.  It's like focusing on making the weather better.

Focus on things that improve NOI. NOI is something over which you have much more control. If you drive NOI higher, even if the Cap Rate is unchanged, your property is worth more. It is also worth noting that people will pay more for properties that are well run and deliver higher income, and that way you might compress the Cap Rate. It all starts with NOI.