Multi-Family cap rates, buyer beware: When do you know they are correctly stated?
Capitalization rate or Cap Rate is a real estate valuation measure used to compare different real estate investments. Although there are many variations, a cap rate is often calculated as the ratio between the net operating income produced by an asset and the original capital cost or alternatively its current market value.
So, for example, if a property recently sold for $1,000,000 and had an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%.
You won’t know if a stated cap rate is accurate until you perform an arduous due diligence process. The selling agent should also know that you are expecting this to be an accurately stated rate and if it isn’t the buyer will be expecting a price deduction.
The acquisitions list that many lenders use can have more than 55 points and there are a handful of points that can impact a Cap Rate and overall asset performance. Many brokers in a seller’s market like today will enhance cap rates based on NOI potential and take liberties by projecting other line items. Of course higher cap rates get more attention from buyers and it’s easy to see why the problem occurs.
In addition to integrity and ability, be certain that your buying agent has your best interest in acquiring your multi-family project. Ask him what criteria he uses to analyze your purchase. Always make sure your purchase agreement asks for all of the back-up documentation to verify the said cap rate. Remember your property tax will be reassessed and that will negatively impact the cap rate.
If you don’t feel your agent is analyzing the deal like he’s going to buy it himself, then you need another agent. Anything less than that commitment from your agent may not be in your best interest.
If you would like to call and schedule a time to discuss the details of my due diligence process, and experience my commitment to serving my clients, send me an email and we’ll get started.