A cap rate is the single number most investors quote first when they size up a multifamily building — and it's also the number most easily misread. If you're weighing a duplex, a fourplex, or a small apartment building across Miami-Dade, Broward, or Palm Beach, understanding what a cap rate actually tells you (and what it hides) will save you from overpaying. Here's a plain-English guide.
The capitalization rate is annual net operating income (NOI) divided by the purchase price, expressed as a percentage. NOI is your rental income minus operating expenses — taxes, insurance, management, maintenance, utilities you cover, and reserves — but before your mortgage payment. So a building generating $60,000 in NOI at a $1,000,000 price carries a 6% cap rate.
Two things follow from that formula. First, a higher cap rate means more income per dollar of price, which usually signals a lower price relative to income or a higher-risk asset. Second, because the mortgage isn't in the math, the cap rate describes the property's performance, not your financing. Two buyers can pay the same cap rate and see very different cash-on-cash returns depending on their loan.
Cap rates move with interest rates, insurance costs, and local demand, so treat any figure as an estimate that shifts by submarket. As a general frame in the current environment, stabilized small multifamily in desirable South Florida areas has often traded in roughly the 4.5% to 6.5% range, with value-add or less-central properties sometimes pricing higher to compensate for risk. A newer, fully leased building in a prime coastal corridor tends to sit at the lower end; an older building needing work in a secondary location sits higher. These are ranges, not guarantees — verify against current comparable sales before you rely on any number.
Investors often assume higher is always better. Not so. A compressed cap rate frequently reflects strong demand, rent-growth potential, and lower perceived risk. A very high cap rate can be a warning: deferred maintenance, soft rents, high vacancy, or an insurance and tax burden that will erode the income the seller advertised.
The formula is simple; the inputs are where deals go wrong. Watch for these:
Treat the cap rate as a comparison tool, not a verdict. Pull it for several comparable buildings in the same submarket and see how the target stacks up. Then pair it with the metrics it ignores: cash-on-cash return (which reflects your financing), debt-service coverage, and a realistic capital-expenditure plan. A 6% cap rate on honest numbers can outperform a 7% cap rate built on optimistic rents and a stale insurance quote.
Reading a cap rate correctly means underwriting the inputs, and the inputs in South Florida — insurance, taxes, reassessment — are unusually consequential right now. The Neuman Group underwrites multifamily deals with current, submarket-specific data rather than seller pro formas.
If you're evaluating a building and want a second set of eyes on the numbers, call 954-228-5001 or request a free consultation. We'll help you separate the real return from the advertised one.
There's no universal "good" number. In the current market, stabilized small multifamily in desirable areas has often traded in roughly the 4.5%–6.5% range, with higher-risk or value-add properties priced higher. Compare against recent sales in the same submarket rather than a single benchmark.
No. Cap rate uses net operating income before debt service, so it describes the property itself, not your financing. To reflect your loan, look at cash-on-cash return and debt-service coverage alongside the cap rate.
A lower cap rate often signals strong demand, rent-growth potential, and lower risk, while a very high cap rate can flag deferred maintenance, soft rents, or heavy tax and insurance costs that will erode the advertised income.
A pro forma cap rate uses projected rents and occupancy the building hasn't achieved yet; an actual cap rate uses trailing-12-month income and expenses. Always ask for actuals and the current rent roll before trusting a pro forma figure.
Both can shrink real NOI. Florida reassesses property taxes after a sale, so your bill may exceed the seller's, and windstorm and flood insurance have risen sharply. Underwrite reassessed taxes and current insurance quotes to avoid an inflated cap rate.