Clarification on the 10/20 Method


#1

I just started reading the 10/20 method book which I’m sure all here are familiar with. The general gist is obviously pretty clear and straightforward. But, in the one example they show that displays the current levered return shows the yield on an 80% LTV loan with an 8% I/O rate. Firstly, these loan terms no longer appear to be the general market rate. More importantly, and this gets to my questions, is the initial part of the 10/20 Method more about locking in a spread of 200 bps or greater between the cap rate and interest rate where just quoting a 10% cap rate over simplifies what’s really at the heart of the approach?

From what I can observe (mind you I have purchased a great deal of real estate but never a mobile home park) it appears that cap rates for slightly sizable, desirable assets are closer to 7.5% to 8.5% with financing available closer to 5%. Thus you are not achieving the going-in 10 cap but it appears that one can still currently lock in a healthy spread (although it appears without the I/O) of 250 to 350 bps.

So, I guess I’m asking is the first half of this approach approach more about the spread I speak of or more about a going-in 10 cap? Everyone obviously loves a 10 cap but how realistic is it to actually achieve this on any sort of scale?


#2

I have been told that the desirable 10% cap rate is what the cap will be AFTER you take over and make whatever changes you are going to do. I haven’t heard very much about the spread that you are talking about. I do think the 10/20 method was written closer to 2008 because the current interest environment is different. I haven’t had a single lender or even seller financing deal offer 80% LTV. Then again I was just looking at smaller parks.

I believe certain metrics are more important to some people than others. I am much more interested in the cash on cash return than I am in cap rate, price per lot, etc.