I realize you usually take 10% CAP into account. How do you figure out the specific market CAP? Like in CA there are probably different CAPs in different counties. San Jose will be different from Redding. Why multiply by 0.7?
Rinain -
Are you talking about the expense ratio? Revenues x .7 = NOI on a park with direct-billed utilities. (e.g. 30% expense load). But perhaps I’m missing something. Feel free to clarify the math you are questioning. Also, get yourself to Bootcamp before you buy a park. The math and much more will be made clear. I’ve also got a podcast that will go over some basics, but here was only so much I could include in an hour-long show:
Best,
-jl-
@ rinain: When figuring the market CAP rate, you will likely need to take a look at what C class apartments are going for in the marketplace. Parks sell at such a low frequency that it is nearly impossible to look at comparable sales data in a specific market to figure out what your exit CAP rate will likely be.
The reason that all of us buy at 10-12CAP’s is that we are almost all cash-flow investors. That means that we don’t put too much emphasis on what our exit CAP rates will look like and we don’t adjust our buying criteria based on the going CAP rate in a particular area. Exiting at a 8-9 CAP is really just icing on the cake and never a guerentee. Personally, I usually evaluate my exit at the same CAP rate as I’m buying at. This lets me compare apples to apples and lets me see how significant my upside really might be.
Stick to the 10CAP rule and always look to the upside to make your exit profitable. If the markets you are looking have suppressed CAP rates, then look at different markets. In apartments, you can choose 1-2 counties and look at plenty of properties. In MHP’s you’ll likely need to expand your search to 1-2 states to look at the same number of deals.
As for the quick ratio multipliers, those are used to see if a deal seems to make sense at first glance. If you are buying at a 10CAP, then you multiply lot rent x occupied lots x 72or84. At a 12CAP, the multiplier is 60 or 70. This just lets you know if you should be interested in it or not. For us, we rarely make offers using these assumptions. We always try to make our offers using the seller’s financials and apply the CAP rate to the NOI on their income statement. Situation always dictates because situations exist where you are sometimes willing to pay lower CAP rates because of significant upside.
Thank you Jefferson. I am just finishing the podcast.