#capitalizationrates

My point here is that if cap rates continue to compress, then multifamily will stop cash flowing and we will need to value these assets the same way that we value stocks that do not pay dividends. What will this method of valuing real estate look like? I don’t know but it won’t have anything to do with cash flow as a metric. People will pay more for the assets…just because?

“Capitalization rate,” commonly phrased as “cap rate” for short, is one of those terms. It is often referred to as “the gold standard” by commercial real estate investors as a way to get a high level understanding of a particular investment property. There’s a lot of information packed into this one number. The simple formula can easily be calculated on the back of a napkin for a quick snapshot evaluation of a current or potential deal.

I don’t think multifamily investors are ready to own multifamily without cash flow. I also think that prices will remain high for the near future. What does this ultimately mean?

Over the last 2 decades capitalization rates (cap rates) have been steadily falling. The compression of cap rates basically means that investors are willing to pay more for less cash flow. Capitalization rate is the relationship between the price of and asset and the amount of revenue it produces. As investors pay more for assets the cap rates fall. In turn the cap rate rises as the income of the asset rises over time (rents being raised).