Class B Multifamily Real Estate Cap Rates
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The capitalization rate, also known as cap rate, is a term that is often used in real estate investing. But new investors may not be aware of what it means since it is one of the more confusing terminologies in real estate, especially for beginners.
But the more you know about these common terminologies, the more you can understand how investments work. This will also improve the way you make real estate decisions.
Experienced investors have different ways of determining which investments are worth putting money into, and which ones aren’t good investments. But since they cannot assess each potential investment property, they use terms like cap rate to make quicker decisions.
Cap rate is one of the metrics that allow investors to narrow down their choices within a shorter period of time. They use it to quickly analyze similar real estate investment properties. New investors can use this as a guide to see how cap rates are used to determine the best possible investments.
What is Cap Rate In Regards To Real Estate Investing & Multifamily Properties?
Capitalization rate is used by investors to evaluate both the risk and the return on investment (ROI) of a real estate investment property. This Cap Rate is especially important for multifamily housing, where the dollar amounts are higher than a single-family residence.
Cap rate is commonly used to evaluate both the return on investment (ROI) and the risk in a real estate investment property. It can help investors find good investments and even determine if their current investments are being mismanaged. [1] Multifamily cap rate plays a huge role in determining the viability of a multifamily syndicator acquiring the apartment building.
Cap rate indicates the net income and rate of return that a commercial real estate property is expected to generate. This is calculated by dividing net operating income by property asset value. The cap rate is then expressed as a percentage.
The result of multifamily cap rates can then be compared with the cap rates of similar investment properties so that the investor can estimate their potential return in the real estate market. This should help investors make smarter decisions before even taking a closer look at each specific property. [2]
Measuring the capitalization rate is easy. Simply determine the net operating income (NOI) of an investment property by subtracting the operating expenses from the building’s overall gross income. Then you just divide the resulting NOI by the investment property’s current market value or purchasing price. [1]
Keep in mind that cap rates are not supposed to be used as the sole indicator of a real estate investment property’s value. It is only meant to be used as a guide and as a way to quickly compare the relative value of similar properties. There are more factors to take into account such as leverage and potential cash flows from renovations and other improvements. There are also no clear ranges for good and bad cap rates: it depends on the context of the property as well as the market itself. [2]
What is a Multifamily Property?
Before diving into the cap rates of Class B multifamily properties, let us take a look at what a multifamily property is.
A multifamily property is any residential building that has multiple units that can be occupied by more than one family, regardless of the number of units. This includes condominiums, duplexes, triplexes, and apartment complexes. [3] The demand for rental investments is increasing across the country. Savvy investors know that during good and bad markets, having real estate assets that create tax free wealth is truly the dream.
Multifamily real estate may take many forms. A duplex is the simplest form of multifamily housing because of its two-unit setup within a single building. The term “multifamily” simply differentiates it from single family homes.
One of the easiest ways for investors to invest in multifamily real estate without shouldering the responsibilities of being a landlord is through multifamily syndication. Under a multifamily syndication deal, investors don’t have to manage the property or deal with tenants. For this reason, it works well as a passive investment. Often the purchase price for a large apartment complex or condo association is too expensive for one single investor. That is where a real estate syndicator like BAM Capital comes in.
Multifamily syndication is when multiple investors pool their money together in order to purchase a single asset. A syndicator, such as BAM Capital, puts the deal together and looks for investors to join in the syndication to fund the purchase price of the asset. Through multifamily syndication, they can enjoy a passive real estate investment and a continuous cash flow without having to become a landlord. They can also earn money from the equity once the deal is finished. [4]
Investors who want to try multifamily syndication should work with BAM Capital. BAM Capital handles all steps of the investment life-cycle, from purchasing to remodeling to management, yielding a higher return for investors.
Class B Multifamily Cap Rates
For multifamily investors, cap rate plays an important role because it gives them an idea of the overall value and potential profitability of specific investments, neighborhoods, and markets. Different asset classes will have varying degrees of opportunities for real estate investors.
Even though cap rates are not supposed to be used as the sole indicator of a property’s value, it can still help investors assess ROI and risk levels. Investors use cap rates to narrow down their options before taking a closer look at these potential investments. In order to compare cap rates, investors need to find two similar properties, meaning both real estate properties need to be of the same asset type, asset class, and location. [1] Property values always play a large role in determining if apartment buildings or multi family buildings are a good investment.
Multifamily properties or multifamily buildings typically have the lowest average cap rates because of their lower risk levels. Property values typically stay relatively even for these large commercial properties. A good cap rate for multifamily real estate is around 4% to 10%. But with that in mind, cap rates can still vary depending on the property that is being evaluated. Perceived risk levels may vary from one asset type to another. [1]
For example, asset class helps compare similar properties based on various factors such as age, location, condition, amenities, etc. Class A properties are considered the best of the best, meaning they are well-located, new, in good condition, and have plenty of amenities. These are multifamily properties where people want to live, and so they are considered the lowest risk investment out of all the property classes. For investors who want to compare cap rates, they will want to compare two Class A properties for a more accurate assessment. The multifamily industry considers this asset class as the cream of the crop.
Class B buildings are real estate properties that are of a bit lower quality than Class A properties in terms of location, amenities, condition, age, and other factors. They may be less than perfect, but these properties can still make good investments because they appeal to plenty of renters. Class B properties could even go up one class after a few repairs or a full renovation. Thus providing a higher value for many investors. Class B real estate properties have the potential to become Class A if some of their main issues are addressed. Some investors focus on Class B properties with the intention of upgrading them to Class A through renovations.
A “good” cap rate for a Class B building will depend on the location and asset class of the commercial property. Cap rates can sometimes vary within the same metro area. Some downtown Class B properties may have cap rates ranging from 6.75% to 7.50%, while a suburban Class B property may have a higher cap rate of 7.00% to 8.00%. [5] Learn more about assets classes from Class A to Class C.
Work with BAM Capital
BAM Capital prioritizes Class A multifamily properties because it values low-risk investments for passive investors. Working with BAM Capital allows investors to enjoy a safe and passive investment through multifamily syndication. BAM Capital has a Midwest focus and prioritizes properties that are Class A, A-, and B++
Multifamily syndication and multifamily investment done through BAM Capital is the best solution for investors who do not want the responsibility of being a landlord while still enjoying a passive real estate investment. BAM Capital will arrange the syndication deal so there is no need to purchase an asset on your own. BAM Capital will also handle property management and invest into the property’s renovation as needed to increase the value of the property to achieve the best rent or ROI for the investors. Investors love BAM Capital’s vertical integration model that mitigates investor risk.
BAM Capital’s current asset offerings are in high demand due to growth within the past year and the diversified asset types in our portfolio. The markets we offer multifamily syndication deals, are in highly desirable areas, often around universities where there is a high demand for rent, and often demand a higher rent than market value
Accredited Investors Love BAM Capital
BAM Capital works with accredited investors and negotiates the purchasing and financing of high quality multifamily real estate properties on their behalf. BAM Capital specializes in real estate investments that provide a solid forecast for return on investment for its investors. This Indianapolis-based company currently has over $700M AUM and 5,000+ units. Schedule a call with BAM Capital and invest today.
BAM Multifamily Growth & Income
Fund IV
Fund IV
The BAM Multifamily Growth & Income Fund IV, a private real estate fund, seeks to balance cash flow stability, capital preservation, and long-term capital appreciation while providing superior risk-adjusted returns to investors.
Benefits of Multifamily Investing:
- INFLATION HEDGE: ability to raise rents on short-term leases to mitigate rising costs
- TANGIBLE ASSETS WITH CASH FLOW STABILITY: a consistent income stream that is not impacted by the ups and downs of the stock market
- ACCELERATED TAX BENEFITS: performing a cost segregation analysis and accelerating the allowable depreciation can lead to major tax savings
- SUPPLY & DEMAND IMBALANCE: there is not enough housing supply in most US markets to keep up with the demand
- CAPITAL PRESERVATION & APPRECIATION: typically low-risk investments that should produce optimal risk-adjusted returns.
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Sources:
[1]: https://2ndkitchen.com/apartments/cap-rate-for-multifamily-investments/
[2]: https://www.investopedia.com/terms/c/capitalizationrate.asp
[3]: https://www.sharestates.com/glossary/multi-family-property/
[4]: https://capital.thebamcompanies.com/
[5]: https://www.feldmanequities.com/education/what-is-a-good-cap-rate-in-commercial-real-estate/
