Unlocking the Full Potential of Your Multifamily Investment: Beyond Cap Rates
A common question that often arises in the world of multifamily investments is, "What's the cap rate?" It's no surprise that many are taken aback by the cap rates that properties are trading for in today's dynamic real estate environment. However, in the pursuit of the best investment strategy, there's more to consider than just cap rates. Two key factors take the forefront: the cost of capital and the spread between cap rates and financing rates.
Our primary aim is to provide informed advice to those we work with. In this month's newsletter, we embark on a journey to compare various scenarios, from all-cash transactions to different financing options (bank/bridge loans or agency loans, with or without Interest Only periods). Our objective is to unravel how these choices affect the Year One Cash-on-Cash return.
Year One Band of Investment: A Closer Look
In essence, we discover that when it comes to financing, a significant portion of your returns, between 65% and 75%, hinges on your financing strategy. Remarkably, in today's era of historically low interest rates, investors can achieve similar returns, even in a market where cap rates are trending lower. These lower interest rates create a win-win situation where sellers can command higher prices, and buyers can secure more robust returns. For instance, in the case of a property with a $500,000 Net Operating Income (NOI), an investor could pay up to $3,600,000 more for it using agency debt with an Interest Only period and still attain the same Year One Equity Return as an all-cash purchase. This showcases the potency of positive leverage and the advantages of using financing to amplify your returns.
It's evident that cap rates from previous years no longer serve as a reliable measuring stick in today's real estate landscape. Focusing solely on cap rates might lead you to miss out on numerous promising opportunities.
When you're prepared to explore the current market valuation of your property, please don't hesitate to reach out. We're eager to strategize with you to help you achieve top dollar for your multifamily investment.