Debt Service

Hey all,

I’ve been hunting around for mobile home parks for a few months and after looking over the numbers along with the debt service, I keep running into the same problem; the debt service is simply too high to leave enough net income to live on. The most common terms I’ve been given by sellers willing to carry have been in the 6% range over 20-25 years.

Can anyone tell me if this is normal for most terms? How do I keep the debt service down?

Thanks!

Those numbers seem reasonable for owner carry if the CAP rate and down payment are right. You have to start with the NOI, get your CAP rate, and then run the different financing scenarios. You should find that a 10 CAP property with 25 % down and the terms you mentioned should get you a decent return on your investment.

Bret

I agree, the numbers seem reasonable. Most of the owners I’ve spoken with want a balloon payment at the end of 3 to 5 years.

Three is too short, five is fairly common. But try and see if you can buy an “option” to extend the balloon out if you need to. Here’s how it works. You agree that, when the balloon comes due, you can extend out the balloon another 3 years or so with a one-time cash payment of $20,000 which applies to principal, to be paid only if you want the extension at that time. What you are effectively doing is building an insurance policy in case rates are lousy or banks are broke when the note comes due.