Current CAP rates and the Future

Hi All,
I’m wondering what people general use for the basic rules of thumb for cap rates in various markets, for your standard 2-star basic park, city water city sewer, mostly TOH. Lets say 60-150 lots.

  1. Primary market, Dallas / Fort Worth for example. I’d say 5.5-6.25% CAP
  2. Secondary market: 150+ population, 130+ median home price. I’d say 6.25-7.5%
  3. Tertiary market: 100-150k population, 100-130 median home price, I’d say 6.5-8%
    This is what I’d see listed on brokers websites. Let me know A) if you disagree with my definitions of the markets B) what CAP rates you think they are
    and finally C) what your prediction is on where CAP rates will be in the coming few years. Myself, I can only assume the go up a bit if there is a recession, but how much? The begs the question, should we underwrite deals with an exit at a higher CAP rate.

Let me know your thoughts.

Agreed from what I’ve reviewed, but they’re all proforma cap rates that match the above it seems or include capitalized POH rent. You’ll see a tertiary market 8+ cap then upon cursory evaluation the valuation included all of the POH rent capitalized AND charging you for the homes. Likewise, you’ll see nicer parks in the cap range you mention, but that cap rate is purely based on proforma expense ratios and economic occupancy to match physical. Granted it is the broker’s job to maximize the price for their clients, so if they can get that more power to them and it seems to be the going way to issue an OM these days.

EDIT: Even private utilities have asking prices around the range you specified. I think there’s so many people plowing into this niche that they’re willing to get in without knowing the difference in utilities, etc. perhaps?

One of my main questions I was getting at was, will there be CAP rate inflation in the next 5 years? CAP rates are tied to interest rates to some extent, so you could also pose the question, will interest rates go up substantially in the next five years?

This is important to any park investor looking to refinance or sell in the next 5 years, since the exit CAP rate is a big factor in the value.

I would recommend underwriting assuming a higher cap rate exit. I’ve seen people do 0.10% per year. If you want to be aggressive, assume same exit rate as purchase. Too many stats point to near term deflation but that’s a whole other discussion…

I’m of the opinion that you can’t predict the future. On an exit, I would underwrite to today’s prevailing cap rates. People have been staking claim that interest rates are sure to be heading back up for decades. In Japan, they call betting against JGBs (rising rates) the Widow Maker trade.

The Fed’s also going to start employing yield curve control so that longer term debt remains as close to zero percent for some time. What does this all mean? Probably a lot less asset price inflation strictly as a result of declining interest rates (although I guess you can’t rule out negative rates).

I think this dovetails your question about rental rates. These are external market factors that are outside of your control to a certain extent.