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Cap rates on single family and condominium rentals can be substantially higher than cap rates on commercial multifamily properties. For example, cap rates on privately owned investment properties in Miami may be around 17% while cap rates on apartment buildings are closer to 10% or less.
Rental days on market (number of days that properties are advertised for rental before listing is removed) is correspondingly high for markets with high cap rates. The high cap rates are a measure of the risk entailed in investing in properties for rentals in such markets.
High cap rates may be associated with several factors:
- As noted above, markets with high expected "rental days on market" are riskier, and higher cap rates are necessary to compensate for the perceived risk.
- There is a glut of single family "primary" residences available for sale on the market. These properties are priced low due to the over abundance of supply, and therefore are priced low relative to comparable commercial multifamily units (to the extent such comparability applies).
- There is a difference between these nominal cap rates and realized cap rates. The rates above are based on asking rents and asking for-sale prices on investment grade properties. It is likely that many of these properties will not rent for the asking rates: either not at all, or at a rent that is lower than landlords are asking in their advertised listings (in this case, the source is classified-type listings by individuals).
- These properties may be on dual markets: "for sale" as well as "for rent." As an extension of the previous point above, many of these properties may never rent at the asking price, not because they don't attract renters at these rates, but because they are utlimately sold off before they can be rented. They will subsequently be re-priced (either as rentals or for sale) at a later point in time, so the data above does not reflect long-term realized cap rates, but only a short-term bubble in expectations.
- Multifamily managers may realize low effective cap rates because they actively exercise the flexibility to adjust rents to match demand. They may, and do, cut rents opportunistically on selected units in order to reduce vacancies. Private investors (1) may feel they don't have the luxury to reduce rents, or (2) may feel that the trade-off between reduced rent and vacancy is not justified by their costs of ownership-- taxes, financing, and maintenance.
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