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There’s a lot to unpack here
1) people who make less than $300k/yr don’t buy $3.3M homes... 2) you still have to pay property taxes and income tax 3) you need somewhere to live...
lol at somebody making $300k buying a 3.3mm home
also 4) a 9% cap is probably a very risky asset and far from a guaranteed $300k NOI in perpetuity. If you want to sit back and collect $300k without any work you'd have to buy like $10-15mm of bonds.
9% cap rates with durable income are hard to find.
That's why the key is to buy it with other people's cash on a double promote and get all your capital back really quick with fees...
The 8-9 caps I finance are limited service hotels in tertiary markets. Trust me, those are not for the faint of heart.
You ever look at extended stays? I've been trying to find out more about that space...
What do you want to know about it? The company I work for is developing 3 right now.
Yeah I have financed a ton of home 2 suites -Hiltons extended stay brand and towneplace suites, Mariott's brand. Anything in particular that you want to know? Hotel fundamentals remain the same- a good flag (suburban extended stay by choice is often terrible) good management and location/drivers are the key for operations.
Leverage/rate? Historical default %?
Generally we have been more conservative in the 2.0 era. So, a 6 handle is what is almost always expected unless its a best in class hotel in a top market. 230-250 bps over swap rate in general but depends on the deal. No I/O, maybe one or two years max and increasingly 25 year am as opposed to 30 is becoming standard especially if the hotel is in a secondary/tertiary market. These are the loan structures requested by B buyers like Rialto, KKR who have seen hotels through the recession and have foreclosed on a ton of hotels. So when we sell a hotel loan to them now, odds are they have owned it at some point in 1.0 and they are very harsh on hospitalty now as a result.
Not sure on default rate on extended stays in particular, but overall hospitality has been doing well because of the strong economy. At one point last year with a around 2% delinquency rate, hospitlity was even ahead of multifamily for a while according to trepp.
OP, while your example caught some flak, your concept is not bad. People can own rental property and scale up until it no longer makes sense to work rather than keep reinvesting your cash flow. It takes a while to build up to that though and it is not an easy process, though not overly complicated.
Your first mistake was assuming that the NOI was actually 300k.
Much more likely it's somewhere along the lines of 150k
Yep. The key word is the original post is "listing"
The OPs thinking/reasoning isn't too bad. But I can guarantee there's a lot more to this story.
That said...I have seen a deal when the listed info was legit and the deal provided for a very healthy return. However...it was just a ploy by the broker to get multiple prospective buyers interested in the deal in order to create a bidding war. The owner had zero interest in actually selling at the listed cap rate.
I always get a solid laugh when brokers list a "prospective" cap rate...and not the actual cap rate. They always say that the current rents are under market value...and then list a new phony cap rate for a deal based on what they say are current market rents. In other words...all of these brokers...if they truly believe their adjusted cap rate is accurate...are essentially admitting their clients are incompetent operators and terrible investors.
Just for fun...I've submitted a few LOIs that call for holding X percentage of the purchase price in escrow post-closing. The LOI states that the escrowed funds are only to be released to the seller once I hit the broker's listed cap rate within 6 or 12 months. Surprisingly...none of those LOIs turned into actual deals.
And why would any of those LOIs turn into to actual deals?
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