Adjusting Offer with Cap Rate - Multifamily 5+

[Chris Levarek]

Hi,

On a 8-plex we are offering on, the seller utilized a 5% cap rate with existing NOI(30k) to arrive at 600k purchase price.

If the average cap rate in the area is between 7-8% on similar properties, adjusting this calculation arrives at 488k price point with potential rents or a NOI of around 34k.

Is this a reasonable methodology to arrive at offer or price point regarding cap rate and potential rents? What are some suggested methods to find the average cap rate in local area, local brokers, comps, etc?

Appreciate any inputs!

Thanks!

Chris

[Jaysen Medhurst]

@Chris Levarek, the best way to determine local cap rates is to talk with local brokers. Comps are tough because you don't know the NOI, just the sale price.

A commercial property's value is determined as you described: NOI / Cap Rate. One important note, the value is based on current NOI, not "potential" rents. The value is based on what the property is making, not what it could make.