Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Walter Pape I think @LeAnn Riley explained it well. The only thing I would add it that the Cap rate has no bearing in lending if the property is residential and has less than 5 units. Comparable sales are the only factor lenders use, income will affect the appeal to the buyer but will not determine the value to the lender or the appraiser.
Real Estate Broker · Minneapolis, MN · Member since 2015 · 116 posts · 67 votes
6y
It depends on the size of the multifamily you are looking for. I listed a 3 unit in Columbia Heights recently that is a 5.28 Cap Rate. On a duplex or 4 plex, I don't suggest using the Cap rate as the measure. It is Cash Flow that is the measurement. On smaller properties and residential loans, it is based more on the borrowing power of the buyer.
On a 6 unit I listed recently in Columbia Heights the Cap Rate is 6.13. On larger multifamily then the Cap Rate is a better measure. The bank is using this as a tool on a commercial loan (5 + units) and also the debt ratio of the property to decide on the loan risk. Commercial loans are based on the asset and it's performance.
Also the location and the condition of the building are crucial factors. If it is a value add situation then the Cap rate is likely lower and a location with a higher crime rate will usually have a higher Cap rate. So...it isn't always the measuring tool, all has to be factored in.
A mortgage professional could surely explain this in further detail.
Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Walter Pape I think @LeAnn Riley explained it well. The only thing I would add it that the Cap rate has no bearing in lending if the property is residential and has less than 5 units. Comparable sales are the only factor lenders use, income will affect the appeal to the buyer but will not determine the value to the lender or the appraiser.
Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Walter Pape can you please give more detail on what you are comparing? For example, what property type, asset class, and investment strategy? Also, are you talking about vastly different markets? IE Minneapolis v Milwaukee or are you talking about Minneapolis v St Paul v Woodbury? Or are you even more specific NE Mpls v Uptown, v Frogtown?
Rental Property Investor · Woodbury, MN · Member since 2018 · 299 posts · 299 votes
6y
Are you asking about 2-4 unit properties or for apartments?
For the mid sized multifamily C class assets I'm seeing cap rates at about 5-6% right now. These are properties roughly between 30 and 100 units. The cap rate has not really changed much in the last year or so.
According to some data sources I follow the A class is trading between a 4.5-5.0%, B class 5.0-5.5% and C class 5.0-6.0%. There may be a lag in the data and I think cap rates are rising because of agency required reserve requirements and buyers fear of increased vacancy rates but I haven't seen any definitive data that will prove this one way or another.
If you are looking at student or senior housing those cap rates would be separate from what I mentioned above and I do not have that data.
Thanks team- how does everyone compare two different markets then?
Are you using IRR, cash flow, or some other meteoric?
I think the biggest metric for 1-4 unit properties is your COC return and your cash flow. Actual cash flow. As @Tim Swierczek mentioned cap rates don't mean much if anything from a lending standpoint. I would never recommend buying a 1-4 unit based on cap rates as it means nothing when it comes to refinance or appraisal on sale.
Investor · Minneapolis, MN · Member since 2016 · 254 posts · 228 votes
5y
@Walter PapeTo add to above, I personally think the best metric is the rent to price ratio, the proverbial "1% rule". As stated, cap rate breaks down when used for 4 unit or smaller properties, as it isn't a reliable way to value the asset, given appraisers will use the comparative sales approach, of course this will work for a triple net commercial property, etc. Additionally, the cap rate is kinda trash if you're buying an type of distressed asset, unless you're using it purely for projections. Of course the the COC & cash flow are purely subjective metrics that depend on you financing, ability to minimize expenses, etc, & aren't objective metrics to compare properties. If you had to force a cap rate onto a small multi in Minneapolis or St Paul it might be 5.0ish or less in the nice A class areas, & 7.5 or greater in the C areas or worse. Hope that's helpful.