REAL ESTATE DURING THE CORONAVIRUS PANDEMIC

Through this Coronavirus pandemic, I have been noticing something strange happening to the Real Estate market concerning Cap Rates. If you remember I posted 2 papers on Cap Rates late last year. It is the way to value an Apartment Building. The way to value an Apartment Building is to take the Net Operating Income, cash flow, and divide it by the Cap Rate, a value used to price a property based on the Net Operating Income, the neighborhood and the amenities of the property.

The lower the Cap Rate, the higher the price of the property and the higher the Cap Rate, the lower the price of the property. For example, a property with a Net Operating Income of $200,000 and a Cap Rate of 5% values the property at $4 million where a property with the same Net Operating Income and a Cap Rate of 3.5% values the property at approximately $5.7 million. I have seen, in the past week or so, the Cap Rates go from 3% or 4% to 5% and higher, I even saw a Cap Rate of 7%. Which means that the value and cost of the properties are going down.

This is in a market where interest rates are at almost an all-time low and where single-family home prices are going up. So, the moral of this piece is that Apartment Buildings are a very good investment now. I don't know if this has to do with the Coronavirus or just a market adjustment. I thought that when the Cap Rates were in the 3% range that Apartment Buildings were overpriced and I suggested to my investor clients to purchase land and build their own Apartment Buildings. But now with prices so low, if you can find a property with the right Cap Rate, it is better to purchase an Apartment Building than to build one.