Who remembers the cult classic “Escape from New York” involving the character Snake Plissken escaping the maximum security prison known as Manhattan and populated by “the crazies.”  Definitely worth Net Flixing if you missed this one.

Now I am not saying it’s the same thing, but… a friend recently sold his portfolio of run-of-the-mill “B” apartment buildings located in Queens, NY at a 4.25% capitalization rate and laughed all the way to the bank.

The rationale for buying multifamily housing is compelling, but not at cap rates that jeopardize your commercial real estate investment. Low entry cap rates create a devaluation risk if (when) rising interest rates and cap rates develop over the next five years.

As the nearby table displays, a rise in cap rates from 5% to 7% results in a loss of valuation of over 30%. Your net operating income would need to grow at 7% every year for five years to offset this two hundred basis point increase in the cap rate!

Profitable private investments are hugely dependent on not joining the Crazies and over paying for assets. You make money in real estate because of location, sensible valuations, operational expertise, and a well planned exit strategy. If some investors are overpaying for an asset class, look elsewhere for deals. Conventional wisdom and intelligent investing rarely are synonymous.

I admit – the Snake Plissken analogy was a total stretch.  Anyone think a 4.25% cap for “B” apartment buildings located in Queens is crazy?