However park is under market by a lot. If I raise rents on day 1 I can get it to a 10 cap and then still be about $50 under market.
Park is immaculate.
Mobiles are all ages, but very well taken care of and 100% full.
95% owner occupied with only a few rentals.
All utilities direct billed to customer except 10% have submetered water.
Owner will carry 40% of the loan at a good interest rate to get his high price.
I know there area and demand is very high.
Some people buy parks at a 5 CAP, others hold out for a 15 CAP. This is subjective and you need to know if this is a reasonable return for you. Also consider how much the market will push up your lot rents over the years based on history as a metric, and also how your expenses (property taxes) may increase along side them. Nobody will be able to answer this for you - just YOU.
This sounds like a very solid deal. I have a few questions.
Will this be your first park ?
What size is the park?
What area of the country are you in?
The reason I ask is because this sounds like a very easy turn around. If it’s your first deal it will get you into the game and help you learn the business. This will then lead to more opportunities down the road. As far as the size, typically smaller parks trade for higher cap rates. (10 cap and above) This is because there will be less total interest for smaller parks (under 40 lots) and more for larger parks. Lastly, certain areas command higher cap rates than others.
If you intend to invest in this you raise the rents to market day one. On the surface this appears to be a OK investment but there is no logic, financially, in not immediately raising rents to market. With new ownership this is the time to do it. Staged increases over time will only irritate your tenants more than a one time increase. If market rent is not your immediate target why do you care if it is 8.5 or 10 cap. There is no logic in supplementing tenants rent.
From your description of the community you have a tenant base that should easily absorb full market rents. Rip off the band aid in one quick motion.
Sounds pretty solid Toben! I asked Frank this exact question last year with a similar property and his response was that they do these kinds of deals often. Granted, the average deal they’re buying is larger and commands a lower cap rate, but this will lead to more opportunities. They rarely buy a deal thats fully stabilized at a 10 cap or higher at purchase. Usually, they are buying it somewhere around a 7 or 8 cap, but there is some easy turn around strategy (like raising under market rents) to get it to a 10 cap or above. Stabilized with upside!
It’s all about the spread. When a 10cap became the ‘general rule of thumb’ interest rates were very high. Up to 7-8%. Today interest rates are so low. You typically want at least a 3% point spread. Frank covers this too.
You’ll find when searching for deals today that 8caps are the new 10caps. If you can find an 8cap with upside and the dd checks out, you have yourself a great deal.
Sometimes you can soften the impact of a rent increase as a new owner by doing something to improve the park st the same time like landscape,paving or other things already planned.
10/20 is just a good target to follow. However, its not always going to be that way. I have bought parks that don’t meet that criteria but only because I know that after I purchase them it will get there quickly. There are a lot of variables.