How high is a cap rate for real property? This is the question that investors need to answer. Let's go one step further: what is a good cap for multifamily property real estate properties. You need to be aware of five key facts about the caprate in order to determine whether your investment is worthwhile.
The "caprate" you should buy at will depend on where you are looking to purchase the property. It also depends on how much return you require to make the investment worthwhile. In other words, it is important to determine your risk aversion. For example, professional buyers of commercial properties might pay a 4% caprate in high demand (and therefore less risky), but opt for a 10% caprate in low-demand locations. For investment properties, it is common to earn between 4% and 10 percent per year.
There are however regional variations to cap rates. A NYC cap rate of 6 percent will be different for a property than it is in a rural area. It is a good rule to remember for real estate investors that cities with higher population tend to have more cap rate compression. Also, their capitalization rates are generally lower on average.
Before we dive into the topic of what makes a good caps rate, it is worth looking at how to calculate that metric.
The capitalization rates are an integral part of any deal. In multifamily realty, many real estate brokers would argue that capitalization rate is equally important as net operating revenue and even as important to the purchase prices. That's actually how you calculate it. This metric will help you decide how valuable a property is and, ultimately, whether you should make an investment in it.
This is a relatively easy way to calculate the metric. To calculate the cap-rate, you must divide an asset's Net Operating Income (NOI) by its Purchase Price.
There are many regional variations. However, generally speaking, lower capitalizations rates of 4-5% would make an asset class A or B.
