July Investor - Cap rates for Multifamily Buildings

This is my first installment of a monthly feature where I discuss the local real estate investment market in three parts.

  • Some relevant statistics with discussion
  • An example of a recent local investment property transaction
  • A blog type article on a subject relevant to investment property

 


A Look At The Numbers

Key Monthly Stats from Quinte & District Real Estate Board Inc. for June, 2017

      We are currently in a Seller’s Market in the Quinte Area.  Gross sales are still carrying strong, up to $713 million for first half 2017 vs. $516 million for first half of 2016.  Active listings are down substantially to 752  vs. 1,236 for June of 2016, given the listing stock many homes in the average price range are now subject to multiple offers.  It is a good time to Sell, however finding the next home may be difficult.

 


 

Investment View

Here we look at a recent investment property sale in the local area.  This is a building that I helped a client of mine purchase.

For access to more documentation provided by the Seller's agent of this property or for evaluation of your own property contact Tom McEvoy (tom.mcevoy@century21.ca)


 

Regarding Cap Rates For Multifamily Buildings

        Tom McEvoy

Cap rates are used to estimate the general rate of return for investment properties by buyers or sellers.  The cap rate equation (Price = Net Operating Income/Cap Rate) is typically used in two ways. 

The first is determining the cap rate for a building given its net operating income and asking price or sale price.  We do this when evaluating a building as a potential investment.  

The second is determining a valuation for a building by using its NOI and a market appropriate cap rate for the investment type.  This is a way of determining an appropriate price for selling a piece of investment property.

Looking at the cap rate equation it is apparent that small changes to NOI can have a large impact on building valuation.  Therefore, from a buyer perspective it is important to get an accurate NOI for a potential investment.  From a seller perspective, maximizing NOI through capital improvements or operational changes can dramatically increase sale price.

Cap rates differ by region and investment type.  Large real estate firms produce cap rate reports which allow insight into general trends and comparisons by region.  For example the latest CBRE report is available here: http://www.cbre.ca/EN/services/capitalmarkets/Pages/investment-insights.aspx

When looking at these reports we can see that cap rates are typically lower in larger markets.  This can be partially attributed to the effect of foreign investors looking for safe places to park their capital while being less concerned with returns.

Often the application of an industry average cap rate or the cap rate of another transaction can yield an incorrect value and expectation.  Expected cap rate for a particular piece of property should be adjusted based on availability of similar properties in the area as well as the quality of the building itself.  Usually it is appropriate to apply a lower cap rate to newer or heavily renovated buildings.

Especially in smaller markets like Belleville, it is important to have knowledge of the local conditions and pool of active buyers in order to use an appropriate cap rate when pricing a building for sale.     

 

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Tom McEvoy

Tom McEvoy

Sales Representative
CENTURY 21 Lanthorn Real Estate Ltd., Brokerage*
Contact Me

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