South West Florida Cap Rate

4 Replies

I received some advise from my banker today.  I though I'll share it here and maybe get some feedback.  I have asked him what cap rate to use when putting offers in on 5+ units multifamily in the Cape Coral, Fort Myers area of Florida.  This question was in relation to the Banks ability to finance those purchases.  This is a part of his answer.

"I think conservatively 10% is a good cap rate to use. It is conservative, but a catch all analysis if the market takes a down turn again. I think you realistically need to shock (reduce your total gross rental income) by 5%, 10%, and 20% to see if it will cash flow on the down side. Then, I would make offers based on the median of this analysis."

Your banker doesn't seem to understand that cap rates are market driven.  Higher cap rates mean higher risk less profitability.  

Looking for 10 caps in a 5 cap market means you are sitting on the sidelines.  You are not an investor.

...That is why your banker is a lender and not an investor...and unless he is confusing debt yields (NOI/loan amount) with cap rates, he probably isn't having much luck lending in today's market - his loan proceeds would be short on almost every deal.

I've spent some time looking at property in SW Fla only to conclude that the yields weren't much better than those available in my home market of Boston. I would have been thrilled to find an honest 8%, but most deals were in the 6-7% range and I just couldn't get comfortable as an out of state owner at those levels. The price per pound was great, but expenses are high and rents are very low in the area, thus the thin yields. I don't think 10% likely if you are using realistic underwriting. Hopefully I'll get my chance in the next downturn.