Down to 4.125 on 5yr vs 4.5 on 7yr… Both 25yr am. Which would you take? Leaning towards 7. Probably makes sense to take the 2 yrs for anything sub 50 bps. Thoughts?
I’m not an expert on the lending market but these seem like pretty good terms for a small loan. Is the park in pretty good shape and stabilized? What region?
What’s your plan with the park? It’s hard to evaluate loan term options without knowing the background.
10 cap going in w/ significant upside (water pass through + filling lots). Midwest deal. Much stronger than I thought achievable.
Take the 7 year. You are talking about something like 3k a year or less in interest difference but you’ll want those two extra years.
I mean it’s a subjective decision. It’s only an extra ~$2500 you’re paying each year, but for most investors the odds that they wouldn’t refi or sell a recently acquired value add park within 5 years is fairly small.
If you’re planning on both holding this park long term, and not buying future parks, the 7 year is a slam dunk.
If you’re looking at purchasing more parks down the road though, after you finish 4 years of renovations the property value will have increased and you’ll be significantly under leveraged, making it likely you’ll want to refi.
Also obviously if you’re thinking of selling after finishing the value add the 7 year won’t bring you much extra value.
Just my two cents, and not worth much beyond that.
@mhp , as per your post:
- “Terms…Down to 4.125 on 5 yr vs 4.5 on 7 yr…Both 25 yr am. Which would you take?”
I am very conservative.
However, I would much rather pay a little higher interest rate and have a longer term.
I would take the 7 year.
I wish you the very best!
Tell me where rates will be in 4 years when you have to re-fi ???
I have a pretty strong macro view on all of this. Happy to discuss.
Thanks very much!.. [character limits should be curtailed?]
Even if your plan is to refi in 4 years to pull cash out, you are still better off with the 7 year. Appreciation is icing on the cake so don’t make decisions based on what you think it will be worth in 4 years and what banks will be willing to do in 4 years. That is called gambling. Consider the extra interest payment as an insurance policy that insulates you a little longer from the lending market.
Perhaps I am just a contrarian, but I might take the 5-year at these numbers. (1) It really is a significantly lower rate for a very small difference in maturity – if I was comparing 5 to 10, I’d take 10 though. (2) There is no way to predict whether it will be better to finance in 5 or 7 years (rate-wise, I mean). (3) Sooner refinance is soonest opportunity to “leverage” your increased sweat equity. Assuming you take advantage of the “significant upside” I assume you want to grow with that money. You don’t want to be “locked” into your park with 50% LTV when you could get that up to 75% and use the 25% (more than $250k b/c now over $1mm?) to go buy another park. (4) This is a smaller bank, right? They’ll probably work with you again (if they still exist). If you’re having trouble refinancing, they’ll have to work with you or they’re gonna be stuck with a MHP which they don’t really want.
One way to look at it is that it’s pretty much a bet on who will be President and how what they do affects the spread between the market’s placing a cap rate on the property and the interest rate. That spread is (one reason) why MHP’s are such a good investment. The 5- or 7- year terms renew either at the beginning or mid-way through the next President’s second term (or the replacement of the next President).
On the other hand, I am a huge fan of the wisdom of crowds and that is what is so valuable about this Forum. Kudos to the MHU team.
Thanks everyone. I’ll add one more item worth consideration. This is a super highly levered deal. The bank is giving me 80%, seller 15% (5%, 20yr am), so I’m basically putting 5% down + closing costs.
Which makes the interest charges a bit more but your balloon even bigger. I would still stretch it out.
Seller second is going to suffer if you can’t get refinanced. Maybe they have an opinion?
Seller is 7 yr term btw… which I guess would argue for the 5 yr to stagger balloons
Update: Got bank to amend to an ARM in exchange for me banking with them. This effectively takes term to 20yrs and resets at year 5 at FHLB 5yr advance rate (~1.6% today) + 275 bps. I now think it’s a no brainer to go with the 5. Is anyone still in favor of the 7?
PS. I am also of the view that we are in a “lower for longer” environment.