Current Capitalization Rates

[Adam R.]

With the increase in interest rates, looming recession, and drop in asset values generally, at what are the cap rates that folks are you purchasing? Is 10% still the magic number or are folks willing to buy at a lower cap rate (or higher rate)?     

[Bradley Cladianos]

It has been a while since Mobile Home Parks were at a 10 cap. I see most Mobile home parks range between a 5-7 cap. I would be happy with an 8 that had vacant homes. 

[Dave Rav]

Always good to shoot for the moon, but yes, must consider current conditions and economy.  I would still try for 9 cap or better.  Definitely narrows the pool of leads..

[Bob Stevens]

Quote from @Adam R.:

With the increase in interest rates, looming recession, and drop in asset values generally, at what are the cap rates that folks are you purchasing? Is 10% still the magic number or are folks willing to buy at a lower cap rate (or higher rate)?     

 All of my deals are cash, and never less then 20% mostly 25% NET caps, used to be higher but pricing has tripled , 

All the best 

[Adam R.]

@Bradley Cladianos with current interest rates doesn't seem like 5-7 caps would still cash flow. Do you have to rely on your changes (e.g., rent increases, expense reduction, etc.) to make the deal work?

[Bob Stevens]

Quote from @Adam R.:

@Bradley Cladianos with current interest rates doesn't seem like 5-7 caps would still cash flow. Do you have to rely on your changes (e.g., rent increases, expense reduction, etc.) to make the deal work?

 why would anyone do anything for 5- 7 % cap? I do hope you mean NET cap, if gross then much worse .

All the best 

[Nathan H.]

Quote from @Bradley Cladianos:

It has been a while since Mobile Home Parks were at a 10 cap. I see most Mobile home parks range between a 5-7 cap. I would be happy with an 8 that had vacant homes. 

Are you willing to buy outside of your area?

[Nathan H.]

Quote from @Adam R.:

With the increase in interest rates, looming recession, and drop in asset values generally, at what are the cap rates that folks are you purchasing? Is 10% still the magic number or are folks willing to buy at a lower cap rate (or higher rate)?     

 In my opinion, ignore cap rates, they're not all that relevant. A low cap rate might have enough upside with a new operator, a high cap rate is probably an embellishment by the listing agent or owner. I'd say maybe 10% of brokers know how to calculate a cap rate for a MHP, so most of what you see isn't even accurate. 

It's purely an indication of past performance, or a wildly optimistic pro-forma. Debt is getting more complicated and loan products more obscure. Figure out what the performance would be under your ownership and your leverage structure and if it can give you your desired return. Rent roll, Taxes, insurance, replacement cost, existing lease terms and assets included in the sale (mobile homes) and location are the things to pay attention to.

[Cory H.]

We're more concerned with the return the park will generate than the cap rate going in. For us the cap rate is more useful in estimating the future value based on where we can take the NOI.

That said, the higher interest rates are definitely making things trickier.  Seems like everyone still wants the same price they could have gotten when rates were less than half of what they are now.  Seller financing--with the right terms--can certainly help boost our offer prices...  

[Adam R.]

@Cory H. Thanks for the response.  Very helpful.

[Dave Rav]

BP just featured an excellent article by Paul Moore regarding this.  Intersection of interest rates and cap rates.

https://www.biggerpockets.com/...

[Wale Lawal]

@Adam R.

High inflation and the corresponding interest rate hikes can impact commercial real estate cap rates—as interest rates rise, so do cap rates. Cap rates tend to have a narrower range than interest rates, particularly over the short term.

While cap rates and interest rates are loosely correlated, and rapidly rising interest rates would generally imply upward pressure on cap rates, the change in cap rates would typically be mitigated by rent growth prospects.

Good luck!

[Adam R.]

@Wale Lawal Thank you for the insight.  Very helpful

[Bob Stevens]

Quote from @Adam R.:

With the increase in interest rates, looming recession, and drop in asset values generally, at what are the cap rates that folks are you purchasing? Is 10% still the magic number or are folks willing to buy at a lower cap rate (or higher rate)?     

 All my personals have always been 20% or better, based on cash purchases,,,,,, 

[Wale Lawal]

Quote from @Adam R.:

@Wale Lawal Thank you for the insight.  Very helpful

 My pleasure, keep learning and growing!

All the best!

[Paul Moore]

@Bob Stevens thank you for your replies on this thread. I'm a little confused on your answers so I wonder if you could demonstrate how you're getting a 20% or better cap rate. Can you give us an example? You also mentioned net versus gross cap rate and I wonder if you can explain that a little more. I look forward to hearing back! 

[Bob Stevens]

Quote from @Paul Moore:

@Bob Stevens thank you for your replies on this thread. I'm a little confused on your answers so I wonder if you could demonstrate how you're getting a 20% or better cap rate. Can you give us an example? You also mentioned net versus gross cap rate and I wonder if you can explain that a little more. I look forward to hearing back! 

 Hello sure, I will provide my last few .  All my purchases are cash.  I only speak about net who cares about gross you can't pay the rent with gross LOL.  SF all in pricing is 60k, Rent will be 1350 (maybe a little more ) so 

Rent 16k

taxes 2100

Ins 1k

Misl 1k ( may not use it but I always put in ) 

Net 12k, so thats 20% Now I get free PM so even if you add the 1200

still net of 11k still 18% 

10 UNIT, all in about 350k, 

Rent 90kish

NET about 60k, 

17% net 

I can provide dozens and dozens of examples with much higher net caps. 

I hope this helps

BTW I used to get 30-35%++ net caps but pricing has doubled, tripled or more in my market 

all the best 

[Paul Moore]

@Bob Stevens hi there! Congratulations it looks like you are crushing most other investors! I wish you well and hope you can replicate that strategy hundreds of times more. 

:) Let me know if you're looking for any passive investment opportunities :) 

[Jared Trindade]

Quote from @Bob Stevens:

Quote from @Paul Moore:

@Bob Stevens thank you for your replies on this thread. I'm a little confused on your answers so I wonder if you could demonstrate how you're getting a 20% or better cap rate. Can you give us an example? You also mentioned net versus gross cap rate and I wonder if you can explain that a little more. I look forward to hearing back! 

 Hello sure, I will provide my last few .  All my purchases are cash.  I only speak about net who cares about gross you can't pay the rent with gross LOL.  SF all in pricing is 60k, Rent will be 1350 (maybe a little more ) so 

Rent 16k

taxes 2100

Ins 1k

Misl 1k ( may not use it but I always put in ) 

Net 12k, so thats 20% Now I get free PM so even if you add the 1200

still net of 11k still 18% 

10 UNIT, all in about 350k, 

Rent 90kish

NET about 60k, 

17% net 

I can provide dozens and dozens of examples with much higher net caps. 

I hope this helps

BTW I used to get 30-35%++ net caps but pricing has doubled, tripled or more in my market 

all the best 

Thank you for sharing that, I found that breakdown awesome to see. 

Cheers

[Bob Stevens]

Quote from @Paul Moore:

@Bob Stevens hi there! Congratulations it looks like you are crushing most other investors! I wish you well and hope you can replicate that strategy hundreds of times more. 

:) Let me know if you're looking for any passive investment opportunities :) 

 Thanks very much, My rentals are passive, but thanks,,,,,,, 

[Mike Sebastian]

Quote from @Dave Rav:

BP just featured an excellent article by Paul Moore regarding this.  Intersection of interest rates and cap rates.

https://www.biggerpockets.com/...

 This is a great article, thanks for sharing!