Multifamily - interest rates and exit caps
Been having a tough time wrapping my mind around how to think about how an increase in interest rates (whenever that happens) will affect cap rates, more specifically, when I underwrite class b multifamily and how to exit on a practically fully turned property to deliver as a turnkey for an investor. Any help on how to think about this would be appreciated
Are you asking about how much it will affect them or why?
The why is pretty easy. Investors need a spread between interest rates and the cap rate they buy at because otherwise the leverage they get is dilutive to the deal (if I'm getting 4% return on my investment, I can't/Won't pay a 5% interest rate).
If you're looking for how much. The last time I looked at this, cap rate historically (not now) have generally had around 100-150 basis point spread between interest rates. We have some cushion until interest rates start pushing up cap rates.
Would you say if fully turned Class B MF prices around 5-5.5% cap that it would be too conservative to assume an exit cap of 6.5% 5 years from now on a similar deal?
Most people I talk to are underwriting 5-10 bps of expansion per year (5.25%-6.0% in your example), so 6.5% would be on the high side given the fact pattern you presented.
yes - too conservative. they're priced the way multifam4life mentioned, seen as low as no expansion in hot markets. you aint gonna win any deals with that spread...
Many groups I have spoken with recently are underwriting exit caps between 4.75 and 5.25. Hard to be competitive if you don't.
Totally get that on being conservative...but 4.75-5.25% on a fully turned class b MF asset with little value-add left...isn't that very tight? Please correct me if I'm wrong..we also look at midmarket deals which I should have included....5-25mm
We're using 4.2% or lower on all deals that are 10 years or newer, and 4.3% or higher on deals that are older.
Omnis tempore quisquam quo modi earum. Excepturi reprehenderit asperiores est pariatur neque. Itaque delectus omnis est velit. Temporibus totam et repellendus aut. Sit eligendi impedit molestiae et quae.
Consectetur labore nam nobis earum facere voluptatem veniam. Suscipit nulla quis mollitia laudantium earum. Sapiente quia aut in distinctio qui doloremque. Nihil quia quidem quisquam molestias.
Sint dolorem sint blanditiis repudiandae excepturi dolor. Qui voluptatum dolore laborum. Cum sint dolor assumenda delectus.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...