Apartments buildings in the United States currently sell for about a 7% cap rate on average, and this average has fluctuated between 6.5% and 7.5% for the last ten years. These figures provide a ballpark estimate.
Since no investor would, or even could, buy all of the apartment buildings in the United States at once, knowing the average cap rate for the whole country has limited practical value. Undoubtedly, what most investors want to know is the appropriate cap rate to use to value a particular building.
Some turn to the Internet looking for the answer and inevitably come across research reports on cap rates prepared by national brokerage firms. These reports are helpful to some extent, but just about all of them fall short of providing what investors really need: enough information to come up with a cap rate for a specific apartment building.
Most research reports list the average cap rate for all apartment buildings that have sold throughout a city over the prior quarter or year. Some go further and show the breakdown of average cap rates for Class A, B and C apartment buildings within a city. This sort of detail is a small step in the right direction but still not all that helpful.
What’s the use in knowing the average cap rate for all apartment buildings in the city of Chicago? It’s a really big city with many different neighborhoods, and some areas simply have higher real estate values than others. For example, properties in Lincoln Park command a premium over comparable properties on the South Side.
Common sense tells us that several factors go into valuing real estate. We know intuitively that a brand new apartment building on the hottest corner in town ought to be worth more than an older building in a depressed area. It follows that the cap rate for these two properties should be different too.
That’s why multifamily buildings need to be evaluated on a case-by-case basis. What are the factors that go into determining a cap rate? It’s all the things your intuition tells you: location, building age, construction quality, interest rates, rental growth rates, etc. To determine a proper cap rate for a unique piece of real estate, investors need to consider all of these variables.
Lenders and investors often rely on local appraisers to value property. To be sure, appraisers can be an excellent resource, particularly for information about sale prices at comparable properties. For those looking to use the Internet to find current cap rates, there’s an excellent, free tool available at www.apartmentpropertyvaluation.com. The website prompts users to input location, income and expenses, and information about the physical characteristics of the building. It then returns a cap rate and valuation based upon all the factors our common sense tells us to consider.