Cap rate on 4 units or less

5 Replies

Hello, Can you apply the cap rate to multifamily 4 units or less when you get a conventional loan with a bank or is better using cash on cash return metric?

1-4 unit properties are valued based on comparable properties. 5+ unit commercial properties take cap rates into consideration when determining value.

You can use it as a metric in your own calculations (mostly to compare to other similar units), but overall, caprates are pretty useless with 1-4 units. Banks will not consider them, only appraisals. 

CoC ROI applies, but banks don't care much about how much money you are making on the deal. Their primary concern is with the Debt Service Coverage Ratio when looking at an investment property.

Hello, In 2 - 4 multifamily unit will banks look a debt to service ratio or my debt to income or both?

Both, if by "debt to service" you meant Debt Service Coverage Ratio. Those two things are a primary concern of any conventional lender.

If this is something you'll be living in (your primary residence) banks will be more lenient.  If it's a true investment property, they will impose stricter requirements.