There is always a delta between the prevailing interest rate and the CAP rate. Except- in some really funky markets in California and other areas- for reasons I really do not want to discuss but some markets track a bit different.
So- values will drop per $ of net income- which might lead to higher rents as owners try to bump values to refi or sell. I believe the real estate curve we seen cycle over and over will have a very flat recovery on the value side for several more years. The interest rates in the market today are very unhealthy, but they have kept the money flowing.
here is a quick look at the effect-
assume 70,000 of NET operating income
8 CAP- 875,000
8.5 CAP- 823,529
9 CAP - 777,777
9.5 CAP 736,842
10 CAP 700,000
10.5 CAP 666,666
11 CAP 636,363
11.5 CAP 608,695
So as you can see- on 70,000 of income with each 1/2 cap point you lose about 45,000 in value. Each point is pretty close to 10% of the value. The real problem here is- there is not a equal increase in the income of the population to offset the interest bump- so something in the market will have to give as our economy begins to get back to a healthy operating status.
Now the good news is- this really has little effect on you unless your selling or must refi. Your cash flow should cover your debt service and expenses. I coach everyone who engages me one of your exit strategies needs to be- hold it forever. If you have entered your purchase with that in mind- you will be fine. If your a buy and flip the park person- you better factor the higher CAP into your buy side or you will be giving away value as CAPs bump.
Keys in this market of raising interest rates-
lock in LONG term financing. Even with a owner carry, build in something where you can pay some equity down to extend the term of the loan. Buy knowing the market will probably be flat for then next several years. If you are going to partner with someone- be on the same page knowing you might have great cash flow, but upside down if you sell- so be ready to wait out the storm. If a partner needs out- write in where they need to exit at the current values, not the purchase values- that way one partner needing out does not topple the entire partnership.
One last thought- it will be VERY important to keep homes in your park. So be proactive. I have noticed over the last few years many of the parks have really started to lock down the homes for sale and the repos in their parks. That trend will strengthen I believe, so homes will be harder to find.
I know many people will not agree with my outlook here- I am not looking for a fight- just stating my opinion. I invest in a pretty conservative way, lots of people make way more money and are less risk averse than I am…
and for the record- I love this market and am in the buying mode.