Why It Matters
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.
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.
Ask an Investor
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.