how am i to make money at a 10 cap? - Posted by clint

Posted by Don McClain on August 15, 2005 at 20:07:26:

What is the down payment you are hoping for?

how am i to make money at a 10 cap? - Posted by clint

Posted by clint on August 15, 2005 at 17:40:40:

im looking for mhparks but with a low amount of park owned homes ,they seem to be in the 10 cap range and once i plug in the expenses 30-35%, minus debt service 6.5% @ 25 yrs. i have about a 10% cash on cash return(sometimes less!). im trying to obtain Rays “%25 return” and not having any luck unless i offer
%50 off the price…any advice?

Re: how am i to make money at a 10 cap? - Posted by ray@lcorn

Posted by ray@lcorn on August 16, 2005 at 11:35:43:


It comes down to deal structure and the investment plan.

As you’ve found, if you try to price a deal for a 25% “going-in” return it will be extremely difficult to get together on price.

The answer is to form an investment plan that provides for whatever improvements, rent increases, etc. over the first three years or so of the holding period. I have done deals where the first year performance was only break-even, but worked out a plan to deliver excellent returns once the property is stabilized. The plan reflects the decisions made regarding your overall deal strategy, e.g. flip vs. hold; turnaround vs. stable property; redevelopment and/or expansion, etc. The point is to not get so hung up on the first year return that you miss the big picture. Remember that this is a “get rich slow” business.

Equal in importance to the plan is the deal structure. If you play around with different finance terms using the derivative cap rate (for an explanation, see you can manipulate the structure of the deal to support the plan. Using the debt terms you specified (6%, 25 year am) and assuming a 75% LTV, it takes a cap rate of 12.33% to achieve a 25% return. Changing any of the components will change the outcome.

For example, assume a $100,000 NOI. At a 10% cap the asking price would be $1,000,000. At an 12.33% cap the maximum price that can be paid and achieve the terms above would be $811,000. That’s a big gap, and depending on the seller’s motivation it may be too big to negotiate solely on the purchase price.

That’s when you play around with alternate deal structures such as seller financing, equity participation, different finance terms, etc… Say the seller would take back 10% at the same loan terms as the first mortgage, but with a five-year call to give him an exit date, then the required cap falls to 10.64%, and the maximum price increases to $940,000. That’s within spitting distance of a deal.

For an excellent tool to help with testing alternate deal scenarios, there is a free online derivative cap rate calculator on Jim Rayner’s site. The direct URL is