Just What Is "A Good Cap Rate" When Purchasing An Apartment Building
Determining what a good cap rate is when looking to purchase apartment complexes is a very subjective undertaking. However, if you forced me to give you a 'general' answer that would serve you well, I would say that you should always look for apartment buildings with double-digit cap rates. And at the very least you want to buy apartment buildings that provide value increasing opportunities that will allow you to quickly raise the "going in cap rate" to double digits very quickly.
Many investors require at least a "10 cap rate" before they will consider even looking at a commercial property, let alone buying it.
(If you are not sure exactly what I am talking about I recommend that you start by getting a free copy of "Getting Started With Apartment Building Investments". It is a 10 part mini-course that will give you a good overview of the process.)
It is also important to keep in mind that relying solely on an apartment cap rate (or any other commercial property capitalization rate) in order to determine value is fool-hearted at best. There is much more that goes into determining value than a good cap rate.
For example, let's say you found a 30 unit apartment complex in a decent area of town. The building had serious property management/owner problems, was 50% vacant, had below market rents and was 'run-down'. Would it make sense to apply a capitalization rate to the NOI (net operating income) in order to determine a value? Of course not. You would employ the use of a capitalization rate in your calculations but not in the regular manner.
Click here for a more detailed example of this type of situation.
On the other hand, if you were looking at a similar building in that neighborhood, but this one was fully occupied at market rents with no deferred maintenance, it would make sense to apply a market cap rate to determine a ballpark value. I can tell you, however, that typically you are going to have a more difficult time achieving a good cap rate on the purchase of an apartment property like this.
Of course not all income properties are either major fixer-uppers or in pristine condition. Most buildings will fall somewhere in between these two extremes. As a new apartment building real estate investor I would not necessarily recommend that your first purchase be an 'extreme' purchase. In other words no major (and I mean MAJOR) rehabs and no full retail value purchases 'hoping' for market appreciation. Both of these types of purchases are better left for down the road a bit.
Your best bet is to look for rental properties that have one or more of the following opportunities:
- Below market rents (Make sure that the rents are truly below market. If the seller tells you they are below market be very weary. Do your own market research.)
- Cosmetic deferred maintenance. Buildings that look worn down but are structurally and mechanically sound can be good opportunities. These types of properties will typically have below market rents as well. Add some new carpet, fresh paint and some landscaping and take the rents to market.
- Poor management. Higher than average vacancies. Deferred maintenance. Below market rents. These are all signs of poor management. Poor management equals opportunity.
If you can find apartment buildings like these, purchase them for a good cap rate and then increase that building's cap rate further by improving the property, you will be well on your way to becoming a successful apartment investor.
Of course, the difficult thing in most endeavors in life is getting started.
And apartment building investing is no different.
Here is what I recommend.
Get yourself an inexpensive but thorough
course on apartment building investment. (Whatever you do, don't go spending $1,500 to $5,000 right out of the gate.)
Here is a course that will get you started.
The sales letter is a little 'hypey' (is that a word?) so just be aware of that.
Next, sign up for my
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