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Experienced investors have multiple ways of determining which investments are good and which ones aren’t. One of the metrics that are commonly used in the world of investing is cap rate.
Cap rate, also known as capitalization rate, is a key metric that is used by experienced investors to quickly analyze real estate investments and compare similar properties. New investors could use this guide to learn how this metric works.
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]
What is Cap Rate?
A commercial real estate property’s capitalization rate indicates the rate of return or net income that it is expected to generate. Cap rate is calculated by dividing net operating income by property asset value. This is then expressed as a percentage. The result will then be used to estimate the investor’s potential return in the real estate market. Comparing cap rates of similar investment properties will therefore help investors make better decisions.[2]
It is easy to measure cap rate. You just have to determine the net operating income (NOI) of a multifamily property by subtracting the operating expenses from the building’s overall gross income. After that, you can divide the NOI by the investment property’s current market value or purchasing price.[1]
Keep in mind that while cap rates can be used to quickly compare the relative value of similar real estate investment properties, they should not be used as the only indicator of a property’s value. There are a lot of factors it does not 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 we get into Class A multifamily cap rates, let us briefly discuss 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. This includes condominiums, duplexes, triplexes, and apartment complexes. The number of units does not matter. [3]
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.
What is a Multifamily Syndication?
Multifamily syndication is one way for investors to invest in a Class A multifamily property without shouldering the responsibilities of being a landlord, such as managing the property and dealing with tenants.
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. 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, depending on the deal structure. [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 A Multifamily Cap Rates
Cap rate is important to multifamily investors because it can give them an idea of the overall value and potential profitability of specific investments, neighborhoods, and markets.
Although cap rates aren’t supposed to be the sole indicator of a property’s value, it can help investors assess things such as risk level and ROI. Investors use cap rates to make the most out of the data that is available to them. It can help them narrow down their options before analyzing investment properties more closely.
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]
Multifamily properties typically have the lowest average cap rates because of their lower risk levels. 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. A Class A property is considered the best of the best, meaning it is well-located, new, in good condition, and has 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.
Class A properties are usually new constructions that are less than 10 years old. Class B, C, and D are older. Class A properties therefore have the lowest cap rates.
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 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. Investors love BAM Capital’s vertical integration model that mitigates investor risk.
BAM Capital works with accredited investors and negotiates the purchasing and financing of high quality multifamily real estate properties on their behalf. This Indianapolis-based company currently has over $700M AUM and 5,000+ units. Schedule a call with BAM Capital and invest today.
