I have been thinking about this, park values are determined typically using a cap rate formula. The cap rate is commonly determined based off the interest rate that a buyer can get from a lender. This would make it seem like prices would come down in a rising interest rate environment. Has anyone been seeing this in the past couple months where interest rates have risen? Would you expect this trend to continue due to all the talk about interest rates going even higher?
Some observations, continue to receive weekly multiply requests from brokers to list our parks for sale or other park owners sending out ??? we want to buy your parks. One of our broker completed 4 sales for $75 million in the past 4 months. There is lots of CASH looking for properties and until that ends the MHP business is wild. People are still willing to have a 5-6 cap rate with upper 4% interest rates. The newbies will be more difficult to enter the market, and maybe need to let the cap rates be more than interest rate for nice properties to justify prices. At some point will the renters be able to PAY the necessary increases for lot rent due to inflation greatly exceeding wage increases? Properties are still receiving multiply offers and in some case bidding wars like the housing market—referring to NICE properties. Again we have a very hot seller’s market and inflation is the program of our government—buying with future inflation being 6% or more it would make sense to buy with cheap money now and pay a low cap rate?? or at least equal to interest rates. There are still probably more than 20 qualified buyers for each listing!!!
As interest rates begin to rise we will see a lot more buyers jumping into the market. FOMO is extremely contagious. Also, the TTC begins to expire at the end of the year which has also boosted demand for MHPs.
I do believe the Cap Rates and interest rates are correlated however, I do not believe the correlation is 1:1
For instance as if interest rise by 1% I don’t think Cap rates will also rise by 1%. I think it will be closer to .8%- .5%
I fully acknowledge that I am guessing on this.
Most of us, if not all of us, use Frank’s 3% rule. The Cap rate should be at least 3% higher than the interest rate on the loan. This formula is extremely reliable.
Here’s what I predict is going to happen and why now is a great time to buy.
- Interest Rates are still below 5%. (05/03/2022)
- Inflation is Still higher than 5% (same date)
Even if you pay a 6% Cap on a property and get 5% lending, the Rents will outpace enough to make the deal make sense. Being as I am in CA the state set the maximum rent increase for 2022 at 9.% MHPs are excluded from this cap in most areas, but I use it as a reference to protect myself from getting sued for unfair business practices.
I do not see Inflation getting under control for 2022 or 2023. So you are looking at raising the rents 16-20% over the next 2 years. THAT IS HUGE.
Borrow Money at 5% and inflate it away at 8.5% plus raise the rents by 8.5%.
Cap rates and interest rates, while many believe they are correlated, are generally not correlated. Cap rates are driven by demand within the capital markets (read: buyers and sellers). If more people want to buy than sell, cap rates will fall. Interest rates really only effect how much leverage you can get.
It always boils down to supply and demand.
Along with rent increases you will also be looking at you expenses on the property going up simultaneously. Labor, materials are going to be more expensive. Not to mention property taxes. I just spoke to a property tax appraiser and he confirmed it.
8% of 500K (income) is a lot more than 8% of 200k (expenses).
So not much to worry about here unless your expense ratio is way out of whack.