Post below is wrong info - Posted by ray@lcorn
Posted by ray@lcorn on April 24, 2000 at 15:07:07:
The gentleman below has confused cap rates with returns. From your post I think you are aware that caps move inversely to value… i.e. the higher the cap, the lower the value.
Average cap rates are like average rainfall… doesn’t tell you much except over a long period of time. That said, I can tell you that the asking prices for income property will vary most with size, then to condition. A park of 100-200 spaces will command a price premium because the size is sufficient to support management, yet small enough to be available to individual investors. Typical cap rates will range from 10-12% on this size park in average to good condition. Smaller properties will sell anywhere from 12% to 18% (and even higher, and are very much dependent on condition. Deferred maintenance is always a prime consideration in valuing a park. So are rental homes. A park with a large number of rental homes will bring much less relative to cash flow than a pure land lease park due to the increased management and maintenance necessary.
The only parks that will command single digit caps will be large, professionally managed, mature parks (the park, not the resident!), usually owned by one of the large REITs or vertically integrated manufacturers. There will be no deferred maintenance, no vacancy to speak of, and it will have a first class amenity package. Pretty rare to find one of this caliber even on the market, much less at a decent price. In fact, the only properties that consistently sell for caps in the 7-9% range are single-user, credit tenant, triple-net properties.
Multi-family values are also sensitive to size. Small projects often sell at upwards of 12% caps, but you don’t often see the variety of property type as in parks. Large apartment projects are also dominated by the institutional owners and will often trade in the 9-10% cap range. But again, these will be “A” properties with no deferred maintenance and a solid track record.
I have always looked at a cap rate as a broad measure of a property. I concentrate more on market factors, deferred maintenance issues, and cash returns when doing my valuation. In short, I feel the cap rate is a good preliminary measure of how much risk and effort is perceived by the present owner. How much risk and effort I perceive is a different question, and the whole purpose of the due diligence process.
Hope this helps,