Cap rate
Cap rate is net operating income divided by price. A 24-unit building generating $200K of NOI sold for $2.5M trades at an 8% cap. Higher cap rate means lower price per dollar of income, which usually means more risk or more value-add work to do.
The capitalization rate, almost always shortened to "cap rate," is the most common shorthand for how a multifamily property is priced. It's a single percentage that summarizes the relationship between the income a building produces and what someone paid (or is willing to pay) for it.
The math
Cap rate equals net operating income divided by price. NOI is the building's income after operating expenses but before debt service.
If a 24-unit building produces $200,000 of NOI annually and sells for $2.5 million, the cap rate is 8%.
If the same building sold for $4 million, the cap rate would be 5%.
The same NOI, two different prices, two different cap rates. Higher price means lower cap rate. Lower cap rate means each dollar of income costs the buyer more.
Why cap rate matters in a sale conversation
When a buyer like Kallpa makes an offer, the cap rate is shorthand for how aggressive the price is. A 5% cap rate offer on a stabilized building in a hot market is fair. A 5% cap rate offer on a B/C value-add building in a secondary market is usually not.
Sellers should pay attention to:
- The NOI used in the calculation. Buyers and sellers often disagree on what counts. Sellers tend to use historical numbers (last year's actuals); buyers tend to use forward numbers (recast to market). The disagreement on NOI drives most price gaps.
- The submarket cap rate range. Cap rates are not abstract. They reflect what comparable buildings have actually traded for in the same submarket recently.
- The capex assumption. A building with a known $300K capex backlog is worth less than one without, even at the same NOI.
How Kallpa uses cap rate
We underwrite to a target cap rate that reflects honest underwriting (recast operating expenses, real capex reserves, realistic vacancy). The target varies by market, asset class, and value-add opportunity. We tell sellers what cap rate we're at, and we explain how we got there.
If our cap rate is 8% on a deal where you expected 6%, we'll show you the recast and walk through what changed. The math is never a black box.
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