Money On The Table - Posted by Tony Colella
Posted by Tony Colella on March 18, 2006 at 10:11:18:
This is a prime example of where fancy math can get in the way of making money.
I have never been a fan of CAP rates but do use them when I talk to banks or buyers.
But even the proponents of CAP rates will tell you that you NEVER CAP rate a single unit property.
As I said, value is unique to each investor. What looks skinny to you looks fine to me. No right or wrong.
I would however approach the deal entirely different that what you are assuming. I am not sure why we would choose to finance for 5 years or pay 20% down. Your right, under those terms the deal may be skinny. I have never had to do either when buying single or double wide land/home deals. But even if I had to, I still see money on the table.
I focus my attention on cash flow (while seeking equity increase my net worth and allow me to tap the property for cash later to do other deals).
Scenario 1: I would pay all cash for the property so as to maximize cash flow. I could use my cash or if need be, or refi another Land/Bank property or simply borrow against the property by going to banks we have established relationships with (stressed here time and time again), finance the purchase through them for 20 or 30 years at a reasonable interest rate.
Or buy however necessary while setting up the long term refi after 12 months to get all my cash out of the deal and still cash flow nicely due to the low interest rate and longer amortization.
Even if we stick with your 5 year or less type amortization we would make money by understanding that this property will not due much for us the next few years cash flow wise (but perhaps we work extra hard to pay off that financing early) but that the property will mazimize cash flow once the loan is paid off in a couple of years. A slight delay in gratification but not a bad alternative, just not my preferred method at this stage.
My point is there are many ways to make this type of deal a nice addition to the portfolio.
The exit strategies would be many which lowers our risk and have the potential to increase profits even further (sell off the home and rent the dirt to reduce maintenance; or sell the whole property off by owner financing the sale at good terms and higher price etc.).
Again, no one is right or wrong but I see money on the table and would endeavor to make it mine with a deal like this.
Tony