Hey Investors -
Hoping you can help me out.
I took the boot camp earlier this year, and read many articles on applying cap rates to your valuation in the MHP industry.
One thing that stood out to me is that there was no right answer for what rate to apply to your valuation.
The lone widely accepted criteria was apply a rate that achieves a 3 point spread between cap rate and finance rate and you will achieve 20% COC return. Also - don’t always get hung up on day one purchase cap rate. You may be able to achieve 20% coc return and the spread with an initial rent raise, cost cutting etc.
With all that said for rough NOI valuation I am just using a plug number of 8% cap rate since loan rates are about 5% (3 point spread) as starting point for my MINIMUM cap rate. I see many people doing this.
From there I try not to focus too much on the cap rate, but my investment criteria and work backwards.
So if my criteria is:
20% COC Return
Double Park Value in 5-7 years.
That will translate to a cap rate of X and valuation of Y based on what I believe I can do with the property (raise rents, cut costs, sub meter utilities, etc.)
This method seems to fail when I see parks offered for cap rates above my minimum - why not just buy them - they are above 8% and you can get the 3% spread?
Obviously the answer is risk (vacancy, etc.), but I have also reasoned that it may be because while they are 10 or 12% out of the gate - there’s no reasonable hope to improve them. I can get my 20% cash on cash return - but I’m not able to improve the property and increase value because it’s undesirable and my overall return wouldn’t be as good. So in that case it sounds like cap rate is just one factor. I should look at the big picture on each deal, factor in my investment criteria and work backwards from that criteria to apply a cap rate that meets it.
Am I thinking about this correctly? is 8 cap reasonable minimum cap rate for a plug number in my initial NOI valuation?