Terri Dobbs, a real estate coach with First Cornerstone Group, LLC., addresses a common question for entrepreneurs seeking small apartments and multi-family properties: How do I determine the capitalization rate for real estate outside my area or state?
Remember, the capitalization rate (or the cap rate for short) is the return on investment on a percentage basis if you paid all cash for a property.
In This Lesson, You Will Learn:
- Who to call for the market capitalization rate of a particular city, community
- Two important questions you need to ask every time
- Another top resource for learning market cap rates outside of your area
- Why you should be careful with LoopNet capitalization rates
“What I do is I call a broker in the area, and sometimes you have to call two or three brokers and get a consensus because they won’t all give you the same answer, and some may not know,” Terri said. “Call brokers in that new area, and ask for the market cap rate.”
There are two very important things you will want to ask these brokers when you call, she said:
Cap Rates Specific to Property Class
The market capitalization rate will also depend on what class of property you are looking at. If you are looking at a Class B or Class C property, be sure to ask them specifically, “What is the market cap rate for a Class B property? What is the market cap rate for a Class C property?”
Cap Rates Specific to Neighborhoods
Also, you want to be specific about neighborhoods and communities within a particular city. Be sure to ask them, “What is the market cap rate for Class C properties in northwest Atlanta in whatever neighborhood.” Even within the same city, the market cap rate can vary, especially if it is a larger city or metropolitan area.
Asking these two very narrow questions will help you get answers closer to the actual number than you would get for asking more broadly for an estimate based on all the houses in a city.
Another Great Resource for Market Cap Rate Information
Terri also recommends real estate entrepreneurs visit CBRE.com because “they have a publication they put out twice a year, usually, and they break market cap rates down by area of country, and Class A, B, and C properties,” she said.
Why You Must Be Careful About LoopNet
“One way you would think you might be able to do it is go to LoopNet to see what they are advertising as market cap rate,” Terri said. “But, you’ve got to remember what they say the market cap rate is when they are selling it is not what we consider the market cap rate.” LoopNet information is the asking price, not what the actual market cap rate is for deals sold recently in that area.
Real estate educator Lance Edwards teaches about market capitalization rates and the cap rate formula in the No. 1 Best-Selling Book, “How to Make Big Money in Small Apartments,” now on Amazon. Check it out for more on this important subject for real estate investors.
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