Episode Details
Back to EpisodesRK# 455 Why a High Cap Rate Could Be a Trap
Description
This episode explains why chasing the highest cap rate can lead multifamily investors into bad deals, since a higher cap rate doesn’t automatically mean better value. Using two $10M apartment examples, it shows how a seemingly superior cap rate can be driven by inflated or unrealistic NOI projections, understated expenses, or post-sale increases in taxes and insurance. It also highlights that higher cap rates often signal higher risk—such as weaker locations, higher vacancy, deferred maintenance, and limited rent growth—and clarifies that cap rate is not the same as investor return or IRR. The script outlines a deeper underwriting checklist, stress-testing assumptions like flat rent growth, rising expenses, expanding exit cap rates, and additional CapEx needs, emphasizing risk-adjusted decision-making over headline numbers.
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