Rising Cap Rates Threaten Your Exit Valuations

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.