The biggest factor that affects cap rates is the level of perceived risk associated with an investment. Cap rates represent the rate of return that an investor expects to receive on their investment, given the perceived level of risk. Cap rates and purchase price have an inverse relationship, meaning that as cap rates decrease, purchase prices increase and vice versa.

A lower cap rate indicates that investors are willing to pay more for the same income stream, which leads to higher purchase prices. Conversely, a higher cap rate indicates that investors are willing to pay less for the same income stream, which leads to lower purchase prices. Therefore, as cap rates increase, purchase prices decrease.

In the context of multifamily properties, the level of perceived risk can be influenced by various factors such as:

1. Market conditions: Supply and demand dynamics, rental rates, occupancy rates, and other market trends can affect the perceived level of risk associated with a multifamily property investment.
2. Economic conditions: Economic conditions such as interest rates, inflation, and job growth can impact the perceived level of risk and the expected rate of return.
3. Property condition: The physical condition of the property, including its age, maintenance, and upkeep, can affect the perceived level of risk.
4. Location: The property’s location and proximity to amenities such as public transportation, shopping, and entertainment can also impact the perceived level of risk.
5. Tenant base: The quality of the tenant base, including creditworthiness and stability, can also affect the perceived level of risk.

This risk can be influenced by a wide range of factors, and it is important to carefully evaluate all aspects of a potential investment to determine the appropriate cap rate.