What Is Cap Rate by Unit Count?
Cap rate by unit count describes how cap rates vary across multifamily size bands. Two-to-four-units often trade at lower caps (higher prices) because residential loans attract more buyers and house hacking demand supports values. Five-plus-units may trade at higher caps. The spread can be 0.25–0.75% or more depending on market. When underwriting, use cap rate comps from your unit-count band—don’t assume a 4-unit and a 24-unit trade at the same cap. Per-unit analysis and NOI assumptions should align with cap rate by unit count for your submarket.
Cap rate by unit count is the observation that cap rates often differ by property size—two-to-four-units may trade at lower caps than five-plus-units due to financing and buyer demand.
At a Glance
- What it is: How cap rates vary by multifamily size (2–4, 5–20, 20+ units)
- Why it matters: Exit cap assumptions affect value; wrong cap = wrong underwriting
- Key detail: Two-to-four-units often trade at lower caps than five-plus-units
- Related: Cap rate, two-to-four units, five-plus units, per-unit analysis, NOI
- Watch for: Market-specific; verify with local comps, not national averages
How It Works
Why unit count affects cap rate. Two-to-four-units attract owner-occupants and house hackers who use residential loans. That broadens the buyer pool and can compress caps. Five-plus-units appeal to investors using commercial loans—a smaller pool, often more cap-rate sensitive. Larger buildings may have more operating expenses and common areas risk, which can push caps higher.
Typical patterns. In many markets, 2–4 units trade at 4.5–5.5% caps; 5–20 units at 5.0–6.0%; 20–50 at 5.5–6.5%. These are illustrative—actual cap rate by unit count varies by market, class, and unit mix.
Underwriting impact. If you underwrite a 4-unit exit at 5.5% but two-to-four-units in your submarket trade at 5.0%, you’re undervaluing the exit. If you use 5.0% for a 12-unit when five-plus-units trade at 5.5%, you’re overvaluing. Pull comps by unit count for accurate cap rate assumptions.
Real-World Example
Denver submarket, 2024. An investor compared recent sales: 4-unit at 5.2% cap, 8-unit at 5.5% cap, 24-unit at 5.8% cap. The cap rate by unit count spread was 0.6% from 4 to 24 units. She was underwriting a 6-unit purchase. She used 5.4% as her exit cap—between the 4-unit and 8-unit comps. On $65,000 NOI, that implied a $1.2M exit vs $1.18M at 5.5% or $1.25M at 5.2%. The 0.1% cap difference was $5,000 in value—material for her per-unit analysis and hold decision.
Pros & Cons
- More accurate exit valuation when you use unit-count-appropriate caps
- Explains why two-to-four-units can trade at premium to five-plus-units
- Supports disciplined underwriting vs generic cap assumptions
- Market-specific; national averages can mislead
- Comp data may be sparse in some submarkets
- Cap rates move with rates and sentiment; historical cap rate by unit count may not hold
Watch Out
- Comp quality: Use recent, similar unit mix and condition comps. Stale or dissimilar comps distort cap rate by unit count.
- Rate environment: Cap rates correlate with interest rates. In rising rate environments, caps may expand across all unit counts.
- Class and location: Cap rate by unit count varies by class (A/B/C) and submarket. Don’t mix.
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The Takeaway
Cap rate by unit count matters for exit valuation. Two-to-four-units often trade at lower caps than five-plus-units. Use comps from your unit-count band when underwriting—it can change your deal math meaningfully.