Investment Property Guide

Putting the Indicators to Work

The best way to see the above referenced indicators in action is to apply them to a real world situation. Consider the following hypothetical example:

A mobile home park is purchased for $4 million, with a 75 percent mortgage at an interest rate of 9 percent and a 25-year amortization. In the manufactured home community projection, the average rates for the five key indicators are as follows:

- Free-and-clear equity IRR 14.78 %

- Free-and-clear equity cap rate of 9.5 %

- Market rent change rate of 5.0 %

- Operating expense change rate of 4.0 %

- Residual cap rate of 10.0 %

For the purpose of this example, let’s compare the numbers if we had, instead, invested in a comparable apartment complex. The average rates for the five key indicators are as follows:

- Free-and-clear equity IRR 10.56 %

- Free-and-clear equity cap rate of 8.99 %

- Market rent change rate of 2.93 %

- Operating expense change rate of 3.84 %

- Residual cap rate of 9.31 %