One of the metrics you wanna look at when you’re evaluating a multifamily deal to invest in, is your exit cap rate. A cap rate is a capitalization rate. It’s essentially the return on a project if you bought it all cash. If you bought a project for $100,000 and it spits off $10,000 a year, that’s a 10% cap rate. It’s also used to evaluate commercial multifamily property and it’s one of the most easily manipulated numbers in a multifamily investment. So, if I have my value, essentially, of a property is my net operating income divided by my cap rate. So, if I have a five cap rate, if I take an [NOI 00:00:43] and I divide it by a 5% cap rate, I have one value, might be here. If I take that same net operating income and divide it by a six cap rate, my value shrinks tremendously, so as you raise the cap rate it makes the value lower. Of course, you can dig into that and spend more time but the takeaway you wanna see is that the sponsor, let’s say it’s a three, five, seven-year hold of a multifamily project, you wanna see what they exit cap rate is, and is it higher than what it is currently. Because, we don’t wanna assume … Right now conditions are very favorable for multifamily sales. There’s a lot of demand, people wanna be in this asset class, interest rates are still very low, historically extremely low, even though they’ve ticked up a little bit. But what you wanna see, you don’t wanna see a sponsor taking today’s cap rate, let’s say it’s six, and assume it’s gonna be six, like six cap in five years. You wanna see that bump up.
Rule of thumb, for me, is 10 to 20 basis points per year of the hold period. Ideally, over a five-year hold period you able see a full point higher cap rate. And what that’s gonna do is that’s gonna make the deal look worse, which is what you want, it’s a conservative way to underwrite. If you see a deal with a six cap rate going in and a six cap rate going out, or a five and a half going out, it’s gonna make that deal look great and it’s the most easily manipulated number. So, the takeaway for you is, you wanna see a cap rate at exit that’s higher than the current going in cap rate, and that’s one of the key metrics to look for when you’re evaluating a multifamily project.