Hi - What is the formula that I should use to calculate the unlevered yield on a park as I don’t want to rely just on low interest rates? Thanks for your help.
A little unsure what you are asking here, but a CAP rate is a measure that is independent of financing. For us, we underwrite our deals using about a 6.5% interest rate. We also choose to ignore the unsustainably low interest rates as well.
OK thanks. So that is one of my concerns that the terminal event is the inability to refinance. So if today I buy at a 10 CAP with a 5% rate and in 10 years when I need to refinance, interest rates are 8% and CAP rates are 14% I would be in trouble.
It’s doubtful that interest rates will be at 8% anytime soon. Buying at a 10CAP is incredibly safe. In addition, your rent raises and time induced principal destruction through the years would mean that in 10 years, your park will still have more than enough equity to refi comfortably in an 8% environment.
Just my personal opinion, don’t worry about those types of things. People who bought smart prior to our big melt down did just fine. Be smart and ignore the low interest rates that basically pay you to own property.