BY LANCE EDWARDS— You need to know how to “cap out” a property or create value in a property. If you are going to wholesale properties, you need to understand this concept because it improves your ability to package your deals for sale to another buyer.
Understanding Market Cap Rates is vital to increasing value in multifamily properties.
The better you can communicate what could be done to a property and how to make money with a property, the higher the assignment fee you can get when you sell that property.
It will have much more impact if you can say, “I have a 50 unit apartment building that is currently at a 9 cap that could easily be at 11.2 cap if you do these things” instead of saying, “I have a 50 unit property, do you want to buy it?”
The more educated, empowered and knowledgeable you sound, the more value you bring to the deal whether you are going to hold it or flip it. In order to do this, you need to understand the Market Cap Rate. This is the cap rate that most properties are trading on a retail basis. The Market Cap Rate can vary from city to city.
As more demand increases in the market, the Market Cap Rate goes down because people are getting more excited about the appreciation. The demand is driving the price.
How does knowing the market cap rate help you? It helps you in terms of determining the value of your property or selling your property. You know that Cap is the NOI divided by the price so you can turn that around and say that the price equals the NOI divided by the Market Cap.
So if your NOI is $27,000 and your Market Cap is 8.5%, then the value of your property would be $317,000. If you paid 220,000 for the property, your equity would be $97,000 ($317,000 – $220,000).
The way you create value in apartments is by raising NOI. Knowing what the market cap rate is allows you to immediately assess the value. If you want to know how much your property will be worth if you do some improvements, just divide it by your Market Cap Rate.
When you are analyzing a property, you want to buy at a high cap rate but you want to sell or refinance at a market cap rate. An appraiser will look at the market cap rate to assess the value of your property. If you just bought a property, you will want to wait twelve months before you refinance.
The more knowledge you acquire regarding your market and the property, the more you are able to accurately assess the property and in turn, create more value. The Market Cap Rate is just one tool you can use to create value.