Short answer is don't get too hung up on cap rate. 
It's one tool we have to help us compare properties to each other.

You could start off by talking with a few commercial brokers and asking them what they think the cap rate is for C class, or B class apartment buildings. (or other types of commercial properties) 

To know the exact average cap rate for your area, you'd need to know the actual income and the REAL expenses for other commercial properties that have been sold lately. 

Since sellers don't provide accurate information, it's difficult for a commercial broker to tell you what the exact cap rate is for an area.


Instead, learn to evaluate properties yourself


Ignore the cap rate you see listed on the web site. (because this is based on the fake expense numbers)

Take the income, use 5% for the stabilized vacancy rate, and use 45% for expenses (with Class C apartments) 

This will give you the NOI, net operating income 


Divide this by a few different cap rates until you get a property value that matches the seller's asking price

This might be .05 

Then follow the property to see what price it actually sells for. If it sold for the asking price then thats a good sales comp indicating that one property sold at a .05 cap

After doing enough of this you'll have your own idea of what the going cap rate is in your area.

WHY THIS DOESN'T MATTER (as much as you'd think)

We're not buying something like a stock that has the same value for everyone. For example, if you find an apartment building with below market rents, when you run the numbers it might be for sale at a .06 cap

Let's say we go ahead and buy it.

Then we increase the rents to market rates, add paid laundry, add an extra unit etc to increase the income.

Three months later, we take the new (increased) income and run our numbers again using the same purchase price. Now the property is at a .09 cap


Ultimately we're using cap rate as a quick way to compare one property to another. Which is a better deal this 22 unit or the 16 unit? We can use cap rate as a quick initial yardstick to tell us which one to focus on and which one to not waste our time on. 

Figure out what cap rate you want to stick with and then use the same yardstick (the same cap rate) to evaluate all C class properties.  

The next step is to figure out the cash on cash return - in theory, a property with a higher cap rate should have a higher cash flow, but that's not always the case.  The interest on the loan, the down payment amount, and any special owner carry terms (like graduated interest payments, or no payments for the first year) will affect the cash flow.

The question is, (if you're buying with your own money) does the cash on cash and Internal Rate of Return (Which includes equity when you sell) look good enough to you?


Or,  (if you're buying with investor's money) is the cash on cash return at least 6 to 8 percent upon purchase and does it increase to at least 12% by the end of the first year. What's the Internal Rate of Return (Which includes equity when you sell) look like to a potential investor?

Summary- big picture is don't get too hung up on cap rate. It's one tool we have to help us compare properties to each other.