Cap rate and 4 family??

[Jerell DeCaille]

Good afternoon Bp family! I’ve been spending the last few weeks analyzing deals on Zillow, trulia, loopnet etc. just to accustomed to determining whether a property would be a good buy or not. I have a two part question, 1) is there utility in determining cap rate for 4 family? and 2) if yes, does the standard 8-12% cap apply to the St. Louis market?

Thanks in advance!

[Evan Polaski]

@Jerell DeCaille, you can calculate a cap rate on anything and it is a valid calculation of your return on investment, as things sit. But from a valuation standpoint they are not needed. I cannot speak for St Louis, but there are a lot of macro level similarities between STL and Cincinnati. I do not see any 4 families in the neighborhoods of Cincinnati that I would consider for an 8-12% cap rate. And those that might be close, I would still not touch, because the cap rate does not account for any Capex and immediate repairs, which effectively increases your purchase price. I also never buy off the sellers NOI, since seller's real estate taxes are likely far lower than yours will be when you purchase and county reassesses property to purchase price. I use a blended actuals and pro forma set of numbers when looking at what my true going in cap rate will be.

To be honest, I also put very little value in cap rates on any properties.  Again, cap ex, interest expense, investor splits, etc all sit outside of cap rate and need to be accounted for when assessing the viability and opportunity cost of a project.