While there are regional variations, it is generally agreed that assets of lower capitalization rates (e.g. 4-5%) would be either a class A asset or a class B asset.
Bottom line: What's a good cap-rate for multifamily? There is no single answer to that question. It is a combination of many factors, including your appetite to risk and your location that determines whether or otherwise a cap rate can be reasonable.
However, cap rates may vary depending on where you live. A NYC property will have a cap rate that is 6%, while a rural property may have a lower rate. The rule of thumb for real-estate investors is that more populated cities will have greater cap rate compression. These cities have, in other words, lower capitalization rates.
A cap rate is only an indication of the current. Keep in mind that while you are taking current income, expenses and future earnings into consideration, the formula doesn't account for changes in management, marketing and other factors. As the investment term progresses these can change the cap rate.
Before getting into the conversation about what makes an excellent cap rate, it's worthwhile to first look at how to calculate this number!
Cap rate does not take appreciation into account. Multifamily properties can and do appreciate. This influences the factor that determines what makes multifamily properties attractive. You can see why the cap rate is so low in San Francisco. Even though the ROI may be low, the land's underlying value is high enough to allow for significant appreciation.
The method of calculating this metric can be done easily. You need to divide the asset's net operation income (NOI), by the purchase price to calculate the caprate.
