The 1-2% rule vs. CAP Rate

[JPaul Mills]

Ok all you seasoned, or not so seasoned, buy and hold investors. Im a wholesaler and I have just sent out a mail campaign for multi family units (2-6 doors).  Now I have heard of the 1-2% rule of making sure your buyer is getting at least that per month on their money, but now I keep hearing cap rate cap rate cap rate!!! 10-12% cap rate is the target mark I hear.  What is the better formula for you and why?  I'm pretty comfortable with the 1-2% rule but I'm still iffy on cap rates. Let me know your thoughts and if you seek cap rate please tell me the best way to find them. Thanks

[Judth Felker]

My understanding is that multi-family real estate with up to and including 4 units is valued the same way Single Family Residences are, using comparable properties in the neighborhood.

For multifamily apartments with 5 units or more, use this formula: Income - expenses = Net Operating Income (NOI). Now do this: write "NOI" on paper and draw a line under it which symbolizes "divided by". Then draw a vertical line from the middle of the horizontal line. The vertical line symbolizes "multiplied by".

On one side of the vertical line, write "R" (which represents "rate" or "cap rate". On the other side of the vertical line, write "V" (which represents "value" or price. Now, if you have any two of those numbers, you can calculate the third number. Try various cap rates to see how the value (price) changes. You MUST know the NOI. I use the numbers the seller or the seller's agent gives me, to figure the price I'll offer on an "Intent to Purchase" one page document. After the offer is accepted, submit the Purchase Agreement (drawn up by or at least reviewed by an attorney). The PA has more than one "escape clauses", one being "verification of due diligence documents", another being "contingent upon satisfactory inspection results". So, the PA is just the beginning of a long process to be sure the numbers work for you. Wishing you best of good fortune!