Are you troubled by the current spate of multifamily transactions with cap rates in the 4s and 5s? The rationale for buying multifamily housing is compelling, but not at a cap rate that jeopardizes your investment and exit valuations.

Low cap rates may be justified for select Class A assets, but cannot be rationalized for core-plus and value-add assets. Betting on stable cap rates over the next five years in an economic period that that has heightened potential for bond market dislocation or Federal Reserve interest rate hikes is risky. It is most likely that you will encounter higher cap rates during the hold period of the investment, and you should set your pricing accordingly.

Target asset sectors not currently being chased by the Wall Street Investment Herd as the best defense is a good offense. There are numerous investment opportunities in out-of-favor asset classes and geographic regions that offer reasonable risk-adjusted returns. For example, office assets, correctly priced, can provide the growth and valuation margins necessary for the upcoming decade of higher cap rates.

Avoiding over paying for an asset is instrumental in achieving the requisite investor returns. Successful CRE investing often necessitates standing apart from the Herd by avoiding the momentum play and focusing on value investing.

As Warren Buffet says, “…be fearful when others are greedy, and greedy when others are fearful.”