At Pacwest Real Estate Investments I receive calls from clients all the time asking “What is the Cap Rate for an Apartment Complex”. A cap rate is the ratio between the net operating income that a property will generate and the capital costs (purchase price). While cap rates vary from market to market, in the Willamette Valley we are seeing cap rates between 7 1/4% to 7.5%.
A key to buying commercial real estate successfully in this market is with low leverage. The cap rate has to be about 2% in excess of the current interest rate that would be charged for the new loan on such property. If you are obtaining a loan the lender’s require a Debt Coverage Ratio of about 1.3 so you need to be attentive to that too.
To ensure that you are buying a quality investment you should carefully study the past three years of:
1. Year-End Property Manager’s Operating Statements; and,
2. Owner’s Schedule E’s for the same years
The operating expense should be about 40% to 44% of the actual rental income received. If it is less than that, then be cautious in using the resulting Net Operating Income for your valuation.
Good luck and let me know if you have any additional questions!
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