Calculating Small Town (15K or less population) Multi Family/Commercial Cap Rate

2 Replies

Hi everyone, 

I'm looking for some help and have questions about the best way possible to go about calculating the cap rate for a multifamily/commercial apartment complex located in "Small Town, USA" 

I am interested in an apartment complex that has 10+ units, and have some rough estimates of the expenses and income figures (the seller is not giving too much information until EMD and agreement signed, so I am working with ballpark figures) but I am trying to find out the best way to calculate a cap rate for a property like this. I have found very little in terms of researching online, any recent comparable sales of multi family/commercial sized apartment properties in the area and I am not sure how the smaller population affects the potential figures.

If any of you have had experience buying in these types of areas, small towns with populations of 15 to 10 thousand, I would really appreciate any help and feedback. 

Thanks!

Since no one replied I will take a crack, but you may know more than me so may not be much help.  I have duplex in such a community.  Get a good realtor that knows the local market.  Don't trust the cap rate they give you, but get recent sales prices and rents of similar properties from realtor so you can calculate it on your own.  Check with property managers to back up rent numbers.  Using 50% rule:

cap rate = rental rate * 50% * 12 / sales price

I have heard people (@Joel Owens I think) say that commercial sized apartments (over 4) it is more like 60% expenses.  so use 40% in above.  Or better yet determine local numbers for vacancy, taxes, insurance, etc.  

Kyle,

You may also want to consider that financing may be more restrictive in a smaller market as some lenders will not touch deals in small towns.  Typically, I am looking for 50,000 people within 5 miles.

Mark

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