However today – thought there are very few trades (and residential buildings aren’t in my ‘wheel house’) I am hearing that cap rates (as we know they are deeply sensitive to interest rates) have risen substantially. I would posit that we wouldn’t see many trades below a 6.5% cap rate.

Obviously cap rate is a very vague term. It doesn’t explain the level of capital imrpovement needed, the number of leased v. empty units, the relative levels of rental rate v. the market rent. It doesn’t take in to account rent control rules and it doesn’t do a great job of explaining capital expenditures needed for the upkeep of the building. And any analysis one does of a specific investment must take all of these (and many others) in to consideration before investing.

It is also important to note that office buiding cap rates have ballooned to the 8.5%-12%+ range. This is because there is still some government backed financing available for apartment/residential investment. One should have an internal discussion about the level of risk of an office/r&d project versus an aparment complex. Right now, my money would shy away from apartment and look toward the areas where financing is more difficult and thus less pressure from bidders on pricing.

Now, all that being said, we must also remember that cap rates are really a function of the demand. As such cap rates are typically lower for four plexes than they are for eight plexes. This is specifically because there are fewer bidders for bigger properties. Any dentist, doctor or successful insurance salesman can aspire to own a four plex. It takes a little more focused real estate investor to purchase and run an eight plex.

So I don’t know the specifics of your market and the details of your investment. But I would expect that the cap rate for an eight plex would me somewhat higher than for a four plex and I would imagine that both of these cap rates would be lower than on similar office/r&d/hotel product in the same submarket.

Good luck with your investment.

-js