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General Cap Rates by Multi-Family Building Class in Northern Virginia – First Half 2018; Just One of Several Methods Used to Estimate Building Value
Sophisticated investors use multiple financial techniques to estimate value when considering the purchase of a multi-family apartment building. Cap Rate is a commercial real estate metric that measures a property’s unlevered return (without debt) based on the net operating income (NOI) the property generates. Cap Rate is a standard metric used in the industry, but it’s usually just the starting place when estimating property value.
What is the Capitalization Rate (Cap Rate)?
The easiest way to think of Cap Rate is the expected rate of return on an all-cash purchase. Let’s use the 6.38% in the above table for a suburban Class C apartment building. Assuming an all-cash purchase, it helps an investor quickly compare the risk-based apartment building investment return of 6.38% to a risk-free investment like a U.S. Treasury Bond, let’s assume at 3%. The 338 basis points delta is the investor’s risk premium between the two investments. However, this is only the unlevered risk premium. Leveraging the property with debt might increase the investor’s return even further.
The Cap Rate is simply a gauge to help investors compare investment opportunities. The higher the Cap Rate the higher the profit and perceived risk. However, it does not begin to address the myriad of other factors vital to assessing building value and risk. Such as specific location, age, condition of systems, apartment condition and improvements, deferred maintenance, tenant quality, rents and absorption, value-add opportunity, etc. These factors help to complete the enterprise valuation.
General Differentiating Factors in Building Classes
There are different expected Cap Rates for different classes of buildings due to age, condition and perceived risk. Most buildings are either Class A, B or C and these classes can generally be considered for a bank loan.
⇒ Class A Multi-Family – garden product generally built in last 10 years (or high rise less than 20 years old), high quality construction, high-end exterior and interior, strong amenities, no deferred maintenance, onsite property management, commands Class A rents.
⇒ Class B Multi-Family – generally less than 20 years old, little deferred maintenance, not as nice exterior/interior, relatively lower rents.
⇒ Class C Multi-Family – generally 30+ years old, dated exterior/interior, higher deferred maintenance, lower comparative rents.
*These are only simple descriptions. There are no formally recognized ISO standards for building class. It’s possible to jump in class. For example, a Class C by age may be considered a Class B by condition.
How to Calculate Cap Rate and Estimate Building Value
Following a typical P&L statement, Cap Rate is calculated by deducting all operating expenses (excluding debt service) from the rental income after vacancy (collected rent) and dividing by asking price.
⇒ Collected Rent (after vacancy) = $100,000
⇒ All Expenses – taxes, insurance, utilities, repairs, leasing, etc. = $30,000
⇒ Net Operating Income (NOI) = $70,000
⇒ Asking Price = $1,100,0000
⇒ Cap Rate = $70,000/$1,100,000 = 6.36%
⇒ Building Value = NOI/Cap Rate ($70,000/0.0636) = $1,100,000
“It is with much enthusiasm that we share with you our thoughts about Tim Trainum. He his the most knowledgeable and informed real estate agent with whom we have ever dealt. Over the last 45 years we have bought and sold a combination of 26 homes, condos, and multi-family apartment buildings in Fairfax, Arlington and other parts of the country. Tim is without a doubt the complete package. He did everything we asked him to do. He gave us great information and advice and kept us informed as to his progress day by day. We highly recommend him.” – Dean and Mary Simonds
I am a high-value agent who delivers demonstrably useful results to my clients. I operate my business with relationship-focused interaction that aligns client goals with beneficial outcomes. I have an unyielding commitment to being an open and honest advocate, ensuring my clients reach their desired outcome efficiently and with the most equity. My overarching passion in real estate is to join your buying and selling journey and help improve your quality of life.
I am a full-time, licensed Realtor® who has established deep roots and knows the region. I was born and raised in the Northern Virginia area, graduating from Chantilly High School and then James Madison University with degrees in Economics and Finance. I live in Fairfax with my wife Liz and our seven year old son Robby. I’m a homeowner myself and understand the important decisions my clients face when they’re buying or selling a home. In addition, I’m an owner of investment property, including a multi-family apartment buildings. I have a penchant for helping people having taught adult education courses in investing and personal finance, and helped numerous clients, friends and colleagues in creating a path to wealth creation. I also serve as the trustee for a private charitable memorial fund.
I have been working in the real estate industry helping clients for over 25 years. As a Listing Agent, the value I create for my sellers is to help them elevate and showcase home condition. I use multiple valuation techniques to pinpoint market value for my sellers. I use cutting-edge marketing strategies to promote widespread buyer awareness and produce the maximum selling price in the fewest days possible, while protecting my seller’s best interests throughout the complete selling and settlement process. As a Buyer’s Agent, I help my buyers locate the home that changes their life. I guide my buyers in structuring the most compelling offer that can win seller acceptance, while retaining the most value and equity possible for buyer benefit and in a manner that protects their best interests throughout the complete buying and settlement process. I have worked with clients in the purchase of investment property, helping them to prospect property as well as evaluate all the financial metrics important to making the investment. My real estate experience includes working in the development, construction and operation of real estate infrastructure projects, closing over $500 million, as well as supporting several commercial real estate clients in the pursuit of reaching their objectives. My experience spans across consulting with clients on remodeling and home improvement projects to negotiating land purchase agreements and easements, to negotiating residential and commercial leases. There are few areas of real estate that I haven’t touched and it continually has been with a mind-set of delivering exceptional outcomes.
