One of the metrics used by real estate investors to evaluate investment opportunities is called the capitalization rate (or cap rate). The formula is basically the net annual income divided by the purchase price. Cap rates do not take mortgages into account – since different investors receive differing financing terms, the cap rate is a quick metric to evaluate an opportunity on a level playing field.
The chart above shows multifamily cap rate trends over the past 10 years, and includes forecasts for the next five. Boston has maintained a lower cap rate than the national average and is projected to maintain that spread in the coming years. A lower cap rate means that investors are willing to accept a lower return on their investment, so investors will pay more for multifamilies in Boston because they view it as a stronger investment.
This article is focused on multifamily investment property – cap rates for other property types (e.g. retail and office) are different, and each property type has its own set of risks and rewards to consider. If you are interested in more market data or have questions about investment property in Boston, please reach out to us.