Well, I am certainly glad that there are people like you willing to take a slow walk to wealth since some day I hope to sell my properties to such.
Let’s look at the deal as I am able to understand it:
$90k NOI, $1.2M = 7.5% Cap Rate.
Say a 2% spread (I guess they will hit you with some points and fees that will close that spread a little) means you make about $18k/year on the money you borrow and some $22, 500 on your $300,000 down payment, giving you a total of $40,500. Let’s call that $40K since projections can not be made to the degree of accuracy that the $500 suggests we can.
So you are getting some 13% return on your $300k. Not bad, perhaps a very slow walk to those happy days in the future of palm trees and white sand beaches, but still not bad. I know this is not cash on cash, like you said in your reply but let’s go with this so as not to make me go to the amortization tables.
Now let’s look at the risk you are taking to get that 13% or so.
You a buying at a fairly low cap rate so there is not much chance you will be selling at a even lower cap rate in the future. But what if rates go up in 5 years when your loan balloons? Let’s say it goes up half a point. That most likely will push the lowest cap rate you could sell the property at would be 8%. Which means the bank would use that number to figure the valuation of the property and how much they would be willing to lend on it.
Let’s figure this – $90,000 NOI / 8% = $1,125,000 X 75% = $843,750.
This means with a .05% increase in interest rates your property may very will have lost $75,000 and you are going to have to dig into you pocket for something like $50k to refinance. [There is going to be some pay down of principle so you no longer owe the whole $90k but I don’t have time now to run the calculations on that - but it will not be much.]
What if rates go up a whole point and pushes you cap rate to 8.5%?
$90,000 NOI / 8.5% = $1,058,823 X 75% LTV = $794,000. Yikes! You made your $40k a year, but you lost $242,000 and have to come up with another $100,000 to keep from loosing everything.
These are actually positive projections of where you will be in interest rates a up a little from where they are now. It could well be that the bank may not be willing to lend a full 75% on the MHP and it may well be that investors having recently been schooled on the risks of leverage (unlike they have in years) demand higher cap rates than the one point move in interest rates = one point move in cap rates.
You should run the numbers with a sharper pencil than I have here to get a handle of the risks you are taking on. See what rent raises do for you. The problem I see with the deal is the short loan, the low cap rate and the lack of opportunity for growth in the stabilized park.
If, say, you had a 50 lot park with 15 vacant lots that would be a different issue. You could fill the lots, sell off the homes and push the value of the property giving you a safety margin. If rates go up, you could curse the FED like the rest of us would be doing, but you would not be in negative territory and perhaps be facing loosing everything if you don’t have the cash handy to help pay off the loan.
Please tell me where I am wrong if you find an error in my analysis.