How do I determine the going market cap rate?

Question

Hello BP! I have a question that I'm sure is as newby as it gets. I found a six plex in n the Phoenix az metro area, called the owners, had the current income and expenses emailed to me and began to do the numbers to determine the value of the property. My preferred method I think is using ROI and cap rate, but I can't figure out the cap rate I should use to determine that. The cap rate for THIS property at their asking price is 5.3. The cap rates of other properties currently for sale in the area seem to average about 7.1, but I don't know where to find data on SOLD multi-family properties online more recent than 2014 or how to narrow down the data to the parameters of the property I'm looking at. Your guidance is appreciated!

Jeff B. · Answer

Walking slowly here.  CAP rate has two variables:  The NOI and the Purchase Price and calc's as

• NOI / Purchase Price

So a) there's no such think as a market cap rate.  The rate b) is specific to YOUR NOI and YOUR Purchase Price.  Low NOI (meaning rents below FMR or high expenses) or an inflated PP will create a Caprate like what you are seeing.  Alter either one and your projections change.

Investigate the market FMR and compare to you rents for each door of the 6-plex.  If yours is too low, can you compete at FRM?  If so, then  that improves your projected CAP.

On the other side of the math, how does your price / unit compare with those around you?  Too high, then lower your offer.

Dovid Staples · Answer

OK, perhaps I'm going about this all wrong. What I was told was to valuate the properties based on the cap rates of similar properties in the area. That It's a good way to gauge if the cap rate I want to attain is unreasonable and to gauge what a fair price would be based on it's operations and see if I'm getting a good deal or not based on the current trends. and whether my offer would be considered low-ball, fair, or too high. I did consider the ones going for a 7 cap, but then considered that perhaps that was part of the reason they were STILL for sale.

Sarah Ziehr · Answer

1. Does this property cash flow?

2. What is the overall % your market has seen as far as increase or decrease over 2014? I have an investor who just made an offer on a property priced at $450k. Best comp sold last year for $450k. In that market we saw a 5% increase over last year, so I advised him to make his offer up to $472,500 based on increase over last year, current lack of inventory, property located in A+++ location, current NOI of $37k per year, plus he really, really liked it.

These may be more important questions to ask yourself versus what is the cap rate. But since you mentioned, if there are others with a cap rate of 7, why aren't you thinking about purchasing those?