I am on the verge of signing a purchase agreement for a 55+ park. The lot rent is well below market in this fully occupied, nice 3/5 park. I plan on a pretty stiff rent increase right after purchase to bring it to the bottom of the market range. I have serious concerns about what looks like serious inflation heading our way with the drunken monetary policy out of DC, and the difficulty with future rent raises for the elderly, many on SS, and their possible inability to afford the rent increases. Anyone want to offer sound advice on why I shouldnât be concerned, and go ahead and pull the trigger? The park purchase will be a very big bite for me with a lot of debt.
Massive debt = massive inflation, no?
Why not raise rent to market and than sell once you get there? That way you get the appreciation and can let the next owner worry about potential inflation. How long do you expect it to take you to reach market?
Also (Iâm no economist so take this for what itâs worth. I am also not providing any investment advice) the powers that be have been worried about inflation for 10 plus years now. It may come. It also may not. And economists canât really explain it. Inflation may arrive and may not.
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As long as youâre in a strong enough market, demand should outstrip supply and youâll be ok with keeping up with inflation.
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Massive debt= leverage, yes. Inflation, not sure I get that relationship exactly.
JD, thatâs one strategy, but Iâm buying this park for cashflow. I think I can reach middle market in 3 years.
And you are correct about the inflation predictions. However, we have crossed the Rubicon with the" money out of thin air", âdebt doesnât matterâ ideology. We now have the highest debt/GDP ratio in our history with no end in sight. Historically, these scenarios donât end well. And if you go to the grocery store, gas station, building supply store, existing home prices up 15.3% in the last year, etc., then you can see inflation is much higher than the Fed puts out for purview.
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westewart, supply and demand isnât my concern. This park has a history of full occupancy. The concern is, as RE investors have done through the ages, raising rents to mitigate inflationary effects on purchasing power of the RE investor, is a winning strategy. But can the 55+ crowd afford the rent increases when many are on fixed incomes? The COLA adjustments from SS donât keep up with inflation.
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The âmassive debtâ reference was referring to the non-stop no accountability oversize reckless Fed Govt. And they leave out the items we spend the most on when figuring there inflation numbers. Economists cant admit they dont know when hyper-inflation will hit but they know it exists. Most of us ignore it hoping the 1980âs doesnt recur. Tax hikes will be here very shortly and will hit us ALL. Wish I could say the over 55 crowd will be prepared but just read that 45% of Boomers will be depending on SS for their income.
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@MWC the other way to look at this is: even if inflation increases, are you happy with the cash on cash returns the asset produces once you reach the market rents? If so, move forward. Make sure you get extremely long term debt on the asset - 10+ years. I donât know the size of the asset, but maybe you can go get Life Co. or CMBS debt. Some Life Companies have debt products that go extremely long term (More than ten years).
If you canât increase rents to keep up with the pace of inflation, that may be okay. Not only will you keep increasing rents over time, but if you go to sell the asset, due to the rents being below market, you will be able to sell it at a low cap rate as the buyer will be able to mark rents to market over time. If you are worried about cap rate expansion, due to the amount of upside you currently have, I think you need to look at where your Yield on Cost (Stabilized NOI/(Purchase Price + Capital Expenditures)) stabilizes compared to the market cap rate. This will also help protect you again the downside. If the deal has a large margin between the stabilized Yield on Cost and the current market cap rate, go for it.
Also look at the contrast between home prices and income in this market. If this is a heavy senior market, and home prices are high, even if your current tenant base canât afford the continued rent increases over time, you should be able to keep attracting tenants if home prices are high. Just make sure to budget for some turnover and getting homes back in your yearly capex budget (unless you believe tenants will be able to sell their homes).
Jay-E,
You are spot on. People being people, we do what we do. SS was supposed to be a retirement supplement when it was masterminded. But people lack financial discipline over their lifetimes and end up with only SS.
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JD,
Thanks for the input. Iâll do review the Yield on Cost. The C on C is around 20%, so Iâm satisfied. It could go a bit higher, as I have some room and some of the infrastructure to add some lots, but I havenât used that in my purchase calculations.
Iâm shopping lenders now. Iâm not familiar with Life Co. Can you expound?
@MWC a Life Co. is a Life Company. Life companies which lending divisions are companies such as AIG, New York Life Real Estate Investors, Prudential (PGIM), North Western Mutual (NML), Pacific Life, Sun Life, Guardian, Teachers Assurance and Annuity Association (AKA TIAA which their real estate division goes by Nuveen), USAA Real Estate. There are plenty others too.
Some of these Life Insurance companies lend on manufactured housing and some donât. I donât know the size of your 55+ asset, so I canât comment if they will look at the deal. They can also be picky with location. They generally like cream of the crop assets. Some of these companies wonât do deals under $50 million while others will go to $3 million. It just depends on the firm. But a few of these companies have long term loan products as they need to match their Life Insurance Company liabilities with assets that have similar duration. I would highly recommend you chat with a loan broker as they will be able to best direct you. You can find your way into these firms as a direct borrower, but it might be harder. They will underwrite your deal as well as your balance sheet. The loans may be recourse and they may not. It just depends. They will very much care about the debt coverage ratio and debt yield (NOI/Loan Amount) as this helps them determine their downside risk.
I used to work at one of the lenders noted above - they all have great products if you can check the box and get a deal that fits their lending criteria. Granted, a loan is a commoditized product and you may find a local lender who can and will lend at higher LTV and better terms.
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Thank you JD. I am working with a loan broker and he hasnât mentioned it. Perhaps because Iâm on the lower range you quoted. Speaking of loan brokers, what is their usual fee, and who pays it? (We havenât inked anything yet as far as his services)
The fee is usually 1% for a senior loan. (Could be larger for a smaller deal). You pay the fee when the loan closes. You technically could wrap the fee into the loan proceeds, but youâll invariably just be adding additional equity to the deal because of this which will offset it.
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He just sent me a 1% fee if he secures a loan. Do lenders usually add the fee to the loan amount for payment to the broker at closing if the borrower desires? How does it add equity to the deal if I pay it myself or have it rolled into the loan?
1% fee charge of course.
So if the purchase pics is $1,000,000 and your loan is $700,000, you will need equity of $300,000.
If the loan fee is 1%, your purchase price is now $1,000,000 plus you need $7,000 to close the loan. So you have an initial âpriceâ of $1,000,000+$7,000=$1,007,000.
Now, subtract your loan proceeds of $700,000 from $1,007,000. This gives you $307,000. You will need $307,000 to close the deal and pay your loan fee.
If you say to the loan broker or bank, can you pay my loan fee of $7,000. The loan can either increase by $7,000. So now your loan increases to a total of $707,000 and your equity stays the same ($300,000). However, your interest payments will be higher and the lender may increase the interest rate.
Alternatively, you could take $7,000 from the loan and pay your loan broker fee. Now you will have $693,000. However, if you do this, you wonât have enough money to give the seller the full $1,000,000 because youâll have your $300,000 plus $693,000. So youâll need an extra $7,000 to close the deal. So youâll end with needing $307,000 of equity.
Does this make sense? I hope this wasnât confusing I tried to explain the three ways you could technically pay the fee and how the money flows.
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