Small trailer/mobile park under contract questions

[Jared Van Horn]

Just recently got a small mobile home / trailer park under contract. Curious on thoughts as far as investment. I'm still waiting on a few expenses and inspections to come back so still have time to pull out if something comes back a red flag. The property consist of 7 trailer spots (small personal rvs) with sewer hook ups and power on each spot. Separate power meters for each spot and tenants pay for their own power use. On the same lot at the end is a single wide mobile home. There is a community laundry/bath house with coin operated washer and dryers that the trailer spots can use. On another attached lot is a newer 1700 sqft double wide with a stick built shop that is beside and is fully insulated with power. The property is 1.6 acres in total with the option to ad a stick built home to the front or another double wide down the road. (Can't ad more trailer spots due to being grandfathered in) whole park is super clean and well kept. All spots are rented except for big mobile home due to past owner living in that unit. 

Rent as followed. 

Trailer spots 1-7 fully rented with rents ranging from $330-380 totalling $2440 

spot 8 is single wide rented at $800

big mobile and shop to be rented at $1600 

total rent $4840

bills are garbage bin at $102 a month (covers all units)

taxes $2000 a year

Park owner pays garbage, water and sewer.

property is on well but public sewer (waiting for those figures.)

room for another $1400 unit down the road 

park is very clean as well as the guest there and in great area. 

agreed price is 550k

loan is at 5% from private lender. Does this deal seem nuts or is it something that you would pass on.  Sorry for the long post.

[Frank Rolfe]

If the revenue is $4,840 per month, then your expense ration will be 50% on this deal and the net income only $2,420 per month which makes the correct price more like $300,000 or less (around a 10% cap rate) and not even remotely close to $550,000 (around a 5% cap rate).

Unless I'm missing something here I would run away from this deal at the speed of light unless you can get the price reduced by around 50% or more. 

[Jared Van Horn]

Quote from @Frank Rolfe:

If the revenue is $4,840 per month, then your expense ration will be 50% on this deal and the net income only $2,420 per month which makes the correct price more like $300,000 or less (around a 10% cap rate) and not even remotely close to $550,000 (around a 5% cap rate).

Unless I'm missing something here I would run away from this deal at the speed of light unless you can get the price reduced by around 50% or more. 

 Just curious on why your thoughts on that. If the two mobile homes bring me in $2400 and the 7 spots bring me in $2400 and my mortgage is right around 3k, how would this be a deal to run away from. Especially with taxes on the whole property being only $2,000 a year. 

a single family home in this town would be around 200-300k and probably bring in $1400 a month. Rentals are hard to come by here. 

This property is very clean with 7 tenants supplying their own trailer and 2 in mobiles that I would own. 

Thanks.

[Dave Rav]

Overall, yes, I think this is a decent deal.  Numbers could be a bit better though.  I dont have experience with RV parks (only MHPs and residential), however if the data you state is true, I feel this deal is worth checking out.  It was mentioned that 50% expense ratio would be expected; though I dont think it will be that high, you DO need to further examine your numbers.  Some missing data. 

You're leaving out REPAIRS.  Expect this.  Mobiles are notorious for needing repairs (frankly, they're just not built to last.  So unless you have a newer one you'll have repairs).  Water well can be problematic, if dated and not maintained regularly.  Do some diligence on these systems; if you need to replace it could be tens of thousands.  Lastly, as I mentioned, I cant speak to regular repairs on RV spaces, but I cant imagine it would be super high. 

I also dont see Insurance expenses.

Oh,dont forget Grounds expense - cutting grass, trim trees, remove fallen trees.  Put in a line item for this.

[Frank Rolfe]

Mobile home rentals cost an average of $200 per month or so in repairs each. You will need a ton of liability insurance with rentals -- and property insurance and worker's comp -- and then you will need a manager to show, rent and supervise all of these on-site. And then there's the issues of property tax, park repair and maintenance, bookkeeping, and about 20 other cost categories.

I've been doing this for 25 years and I can guarantee you the expense ratio will be 50% best case on this deal as you have described it. If you don't budget at least that much you are walking into a financial ambush and may not survive.

I'm not trying to be a downer, but just to keep you out of trouble.

[Rachel H.]

@Jared Van Horn If you can sub meter the water/garbage/sewer, it may help to pay less expenses. I'd look into any infrastructure issues with the plumbing for the park. This is a major expense when it comes to these types of communities. 

Doing a quick calculation, it looks like you're paying over $68,000 per lot based on the purchase price and number of lots plus the income from the big mobile and shop to be rented. Not sure if that is projected income or current income (for the big mobile and shop). You may want to look at the contracts in place (if any) and future contracts for the community. 

Hope that helps. Best of luck with the deal! 

[Jared Van Horn]

Quote from @Frank Rolfe:

Mobile home rentals cost an average of $200 per month or so in repairs each. You will need a ton of liability insurance with rentals -- and property insurance and worker's comp -- and then you will need a manager to show, rent and supervise all of these on-site. And then there's the issues of property tax, park repair and maintenance, bookkeeping, and about 20 other cost categories.

I've been doing this for 25 years and I can guarantee you the expense ratio will be 50% best case on this deal as you have described it. If you don't budget at least that much you are walking into a financial ambush and may not survive.

I'm not trying to be a downer, but just to keep you out of trouble.

 I guess I don't see where a mobile home would cost $200 a month in repairs. Also, I would only own 2 mobile homes on the property and the other is 7 spots for long term rv parking with hook ups. Tenants bring their own trailer, so for me I don't have to worry about maintenance on their trailers. Just the spot they are parked in. In the contract the tenants are required to keep insurance still on their trailers while renting. There should not be much showing of trailers or spots unless one comes up available for rent, which I do live less than a mile or two away. Not arguing with you but just trying to understand everything you've mentioned.  The county also would allow the shop to be turned into a separate unit such as a small studio and the front to add another mobile home or a small stick built home. Taxes are $2,000 a year which I like. Still waiting on other figures from sellers. 

[Frank Rolfe]

Before you put a penny into this deal PLEASE read every available book on mobile home parks and do some free research by calling other park owners in the market to test your cost assumptions.

I've never seen the deal or the market, but I know that your expense ratio on a park this small is 50% or more. I've owned over 400 parks and I've owned parks just like this one and you will be lucky to hit 50% of net income when you add in all of the realistic expenses it will require. 

If you pay $550,000, your property tax bill will adjust to $5,500 per year NOT $2,000 (assuming your tax rate is at least 1% of assessed value. Your manager cost will be at least $3,000 per year. Your insurance will be around $3,000 per year. Your park repair and maintenance will be around $2,400 per year. Your mobile home repair and maintenance will be around $4,800 per year. Your utilities will be around $5,000 per year. Your back office bookkeeping and tax return preparation will be at least $3,000 per year. And just those items add up to $26,700 per year, which is around 50% without even adding all the other more minor costs.

[Heather Paternes]

Hi! I would listen to Frank Rolf as he is one of the biggest MHP owners in the USA.  He knows his stuff. I just purchased his bootcamp for next weekend and I am reading all the information that you get included with it. And it is mind blowing the stuff you would never think of. I highly suggest signing up for the class as it is next weekend and it could save you hundreds of thousands of dollars. (I do not work with him or make a referral fee but am so impressed with how much I have already learned). MHP do not seem to be as forgiving if you buy too high like some other asset classes. And when something goes wrong, like needing a new well or repaving the road, it can be costly. 

(Check his website as I think you can pay to have a deal looked at and analyzed, that maybe an idea if you could not do the bootcamp)

Whatever you decide good luck and let us know how it goes! 😊

[Dave Rav]

Ok, ok this deal isn’t all that bad.  A bit of catastrophizing …

Everyone’s management styles are different.  Some cost more, some less.  I do agree, those property taxes will go up after sale.  So, that $5,500 may be realistic.. Though I don’t know how we come up with a number unless we live in that jurisdiction (I don’t). Manager cost could be $3,000 per year - maybe more maybe less. MH repair and maintenance of $4,800 per year is arbitrary.  It really depends on the current condition AND age** of those couple mobiles.  A newer and well kept mobile could be $0 that first year!  Repairs are surely coming in the future, but can’t be pegged at “4,800”.   I speak from experience and over the last 12 months my MHs have averaged $800-$1,500.  It just depends.  And older MH and a tenant who lives “hard” can negatively affect this.  Screening helps mitigate that some.  Back office bookkeeping and tax return of at least $3,000 per year can certainly be reduced.  Sure, if I close my eyes and just pick anybody to perform these accounting tasks, I would probably pay even more.  Minimal shopping around and use of automated systems and tech will undoubtedly cut that by 30-50%.   For me personally, I had just one small park come to $600/yr for accounting and tax prep.  Don’t believe the hype, but DO your numbers and look at ways to reduce expenses.

[Frank Rolfe]

Here's what I would suggest. Do a Best Case/Worst Case/Realistic Case analysis of this deal. Use 50% expenses for the worst case, and then use whatever you believe the best and real cases to be. If you can survive the worst case, are happy with the realistic case, and ecstatic with the best case, then you go forward. If you can't survive the worst case, are unhappy with the real case and not even excited with the best case, then call it quits.

I have not seen this deal nor do I even know where it's located at. In the photos it would appear to be an older, higher density property in a rural area. But there's something about this park that attracts you.

At the end of the day, everyone in the mobile home park business has to place their bets on what they truly believe to be a good deal for themselves. So if you think this is a great deal, then bet on it. 

I'm just trying to keep you out of trouble because I've owned around 400 parks and I'm pretty familiar with how they turn out in the end. I know that my "worst case" assessment is actually the "realistic case" assessment through trial and error. However, I'm sure Steve Jobs parents told him more than once that he was crazy and it all turned out fine.

[Scott Esmail]

I would listen to @FrankRolfe if he is an expert. I bought a park a few year back  and he warned me about well, septic and dirt roads and that those would be a issue for me. They were in fact the 3 biggest issues for me when I owned the park. I would never again buy a park with any of those 3 items. I should have listen to Frank at that time would have saved me a lot of headaches. Also I second the fact that mobile home cost a-lot to keep up each month. There not like house quality. Roof leak a-lot, floors get soft and things break a-lot. I also found it hard to get a good quality tenant