What is a Cap Rate?

Cap rate is a market indicator of what an investor will pay for a property in relation to the income stream that the property generates. And there’s no indicator, it’s not like a Kelley Blue Book where you can look up a specific cap rate, a cap rate is determined by the market and what an investor will pay for a property.

So as a commercial real estate broker what I do to help my clients get their properties ready to go on the market is I look at your current rent roll and I look at the last three years of your operating statements, and then I establish your net operating income. And then from there, we apply a market cap rate.

A lot of people say, “Well, how is the cap rate established?” And really, a cap rate is the determination of what an investor will pay for a property based on the risk and what they are willing to pay in relation to receive that income stream.

With my 30 years of experience in the commercial real estate market, I can just look at a property and I know where it should be and what cap rate should fall into it. It’s similar to when you go to sell a used car, as an example, and you look up the Kelley Blue Book, but then you really need a market expert to tell you, “Well, here’s where I think it’s going to sell.”

There is a rent cap. The Oregon legislators put in rent controls several years ago. And what’s happening right now is it’s 7% plus CPI. CPI just fell in September of 2020. So, right now the maximum rent statewide that you could increase your rent is 9.21%.

Now that sounds like a lot, but most landlords right now, because of COVID, are not raising their rent to that extreme of 9% for rent increases. Where we would see people that would ask, “Hey, how much could I increase the rent?” is if they buy an apartment with the concept that they’re going to do a value add opportunity.

So they want to go in and gut the whole apartment. And then they want to raise rents to the maximum that they could. There is a cap on that of 9.21% for maximum rent increases.

Right now there’s a rent moratorium, or I should call it an eviction moratorium, happening in this state where you cannot evict tenants. I get this call a lot. If you buy an existing apartment complex and it has tenants in it, you must take the tenants that are there. You can’t just give everybody notices that you’re going to raise rent and hope that they move out. That’s against the law now. So there’s no longer a no-cause notice opportunity in Oregon. You have to actually take the tenants in place and do your rent increases per the state requirements.