Broker says the duplex is a "6.8 cap" but my lender never mentioned cap rate once

Question

I'm looking at a duplex listed at $340k, and the listing sheet says 6.8% cap. The lender I talked to went through my income, my credit, the down payment, and the appraisal, and cap rate never came up. So who is the 6.8% for? I read somewhere that cap rate is basically your return, which would be better than a savings account, but then someone else told me cap rate has nothing to do with what I put in my pocket because it ignores the mortgage. Both of those can't be right. And if the appraiser values a duplex off comparable duplexes anyway, does the cap rate change anything about what I should offer?

Rena Guide · Accepted Answer

Cap rate has a strict definition: net operating income divided by price. Net operating income is the rent you actually collect after vacancy, taxes, insurance, water, repairs, and management, before any mortgage payment. So on a $340k duplex, a real 6.8% cap means about $23,000 of NOI a year. The mortgage is deliberately left out, which is why the number says nothing about what lands in your pocket. That is your cash-on-cash return, and it depends entirely on your loan.

The loose usage is the one on your listing sheet. Plenty of brokers compute "cap" from gross rents minus taxes and insurance, sometimes using rents the current tenants aren't paying yet. Take that $23,000 and add back a 5% vacancy allowance, 8% management, and a repair reserve, and a 6.8% quickly becomes a 5.2%. Rebuild it yourself from the actual leases and the actual tax bill before you treat it as a number.

Small multifamily generally trades around 6 to 7% when the expenses are honestly counted, a little above single-family, because two rents produce more cash flow than one.

Your lender ignored it because a two-unit is valued off comparable two-unit sales, not off income the way a 20-unit is. Cap rate is your screening tool for whether the price makes sense to you. It won't move the appraisal. What can move your deal is the appraiser's opinion of market rent on the other unit, since some loan programs let a share of that rent count toward qualifying you.

tashaford30 · Answer

Ask the broker for the expense list behind that NOI in writing. When I've asked, twice the answer was taxes and insurance only, no management, no vacancy, no water bill on a building with one meter. That's not a cap rate, it's gross rent minus two lines.

nicole_adeyemi · Answer

One thing that eats these listing caps in a lot of counties: the assessment resets on sale. If the seller has held the duplex a long time and the assessed value is well under $340k, your tax bill in year two may be several hundred dollars a month higher than the number in the pro forma. Reassessment rules vary a lot by state, so pull the county's own explanation rather than trusting the listing's tax line.

monica_tran3 · Answer

Whoever wrote that sheet used market rent, not the rent roll. Ask what the tenants pay today.

priya_n21 · Answer

So if I want to know what actually shows up in my account each month, I'm looking at NOI minus the mortgage payment, divided by nothing? I came into this thinking the cap rate was the answer and now it looks like it's a comparison tool between buildings and nothing more.

diane_kowalski · Answer

marlow, that's about right. NOI minus debt service is your annual cash flow, and dividing that by the cash you actually put in gives you cash-on-cash. I care less about the entry cap than about whether the rents are below what the units would fetch cleaned up. A 6% today with $200 per unit of rent upside beats a 7% where the seller already pushed rents to the ceiling, at least over a hold I'm measuring in a decade.

ehernandez74 · Answer

The line I never see in a listing pro forma is capital reserve. Roof, two water heaters, and a shared driveway on a $340k building isn't a rounding error. I pencil $250 a unit per month before I even look at the cap rate, and a lot of listings stop looking interesting at that point.

paulgrant17 · Answer

Also check what vacancy they assumed. A duplex where one side turns every year has real turnover cost, paint and cleaning and a few weeks empty, and the listing sheets I've read either use 3% or leave it out entirely.

Broker says the duplex is a "6.8 cap" but my lender never mentioned cap rate once

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