I love cap rates – they’re a great way to screen multi-family buildings when you’re trying to narrow down your list. They’re also good for using as a frame of reference. For example, I talked to an apartment buyer in Southern California last week and told him we’re looking at cap rates in the 9-11% range here, while they’re in the 4-5% range there.
But where they aren’t useful at all is in the actual purchase decision – because the cap rate does not take financing into consideration. And in this credit market, where there are few options and even less flexibility, financing terms and conditions are critical.
