Cap rate for small town? Less then 5,000 population.

[Doug Bloes]

I just tied up my first apartment building in a nice small town. It has 8 units and the inspection came back in great shape. Its the best in town! Owner is retiring. Rents are $100/unit less then the market rate. Expenses are extremely low and the tenant base is great. Would like to increase rents over the next 2 years to market rate and allow pets to also increase income. I'd like to then refinance and pull the increased equity out. How do I know what cap rate to use when determining the value? I purchased the property at $330,000, NOI is $37,000. That means I bought it at 11%. Is that the same cap rate I use when I calculate my future refinance? Am I missing something? Any help is appreciated, thanks!

[Chase Louderback]

Hi @Doug Bloes

Is this town near any larger cities?  Say 30 minutes or less?  That could effect your cap rate and make it a little lower. 10% cap rate should be very safe but you can always be more conservative and assume it is going to be the same cap rate as the purchase that the bank will look at when you try to refinance.

If you have a larger city nearby or could get more comps from a broker you could find out what the current market cap rate is that way.  Say the current market cap rate is 9%, then add 0.5% or 1% to that in order to get a conservative idea of what your refi should be like.

Generally, you will project a 0.5% or even 1% increase to the cap rate at refi or sale depending on your timeline, but for a property with a cap rate that high on purchase then that would probably be excessive.  Hope that helps!