Cap Rates on Apartments Dropping From a Year Ago

According to Zelman & Associates, the average apartment Cap Rates on Class A apartment properties has dropped to 4.55% while Cap Rates on Class B apartment properties have dropped to 4.85%.  One of the downsides of a strong economy with low inflation and plenty of money available for mortgages is that it becomes more difficult to find properties with strong yields.

If you invest in apartments, then to buy now is to buy “high”.  Later, when you sell, the complex the sales price will be a function of the market apartment Cap Rate and the property’s NOI.  In Metro Atlanta, we are able to help our clients find rental houses with Cap Rates between 5.5% to 6.5%.  Rental houses offer other benefits when it comes to generating higher yields.  When bought correctly, rental houses can offer higher IRRs than other rental alternatives.  The Cap Rate only analyzes the net operating income or cash flow generated by the property.  Internal Rate of Return (IRR) looks at cash flow AND appreciation AND loan amortization.

We often help our clients find houses that are undervalued, usually due to deferred maintenance so that we can help them develop some instant equity with the initial Rehab or repair of the property.  The newly renovated property will then get a higher rent which generates a higher Cap Rate while the client holds the property.  Later our client can sell the house for full retail to an owner-occupant, rather than a lower price to an investor that is buying based on the Cap Rate, and so our client ends up with a higher IRR.