I have located a mobile home park in a rural area, approximately 45 minutes east of a major city. My brother and I are looking to go into this together. He is 45 minutes away from the property and I am 4 hours away. The property has 33 pads. They are all on city water, gas, electric and sewer. 27 of these are occupied (renting the dirt/pad only) and the one park owned home is rented for a total of 29 tenants. Rent is $140 monthly for the pads and $325 monthly for the home that is park owned. Tenants are required to cut their own lawns and maintain the yards. The utilities are underground. The only infrastructure is an ashpalt road that runs through the property in fair shape. There are a few trees remaining on the property. The owner developed the park 40 years ago and lives 10 miles down the road. He does the maintenance on the property (mainly snow plowing he says). Tenants are on a month to month agreement. If we have expenses of $1,500 yearly for insurance, $4,000 in maintenance (my estimate for hiring someone to do the plowing and salting with some other room for more maintenance costs), monthly rents of $4,105 (or $49,260 yearly), plus an additional $1,500 in administration costs, what is a fair sales price for the property? There is room to develop 2-3 more pads (with substantial costs for taking trees down and building the pads). I don't think the owner has advertised any of the vacant pads as he is near retirement and owns the property without any debt. What should we offer? Seller financing may be possible but unknown at this point. Thanks in advance!
Cash Flow: $49,260
Expenses: $7,000 ($1,500+$4,000+$1,500)
I should also add that I think the rent is below market. Some parks in the area rent for $180 monthly.
Michael, I am a park operator and would say your realistic expenses will be closer to 40% of the gross and possible higher because of the small scale of then park.
Thanks for the reply. What would some of these costs be? Are they mostly admin type costs or more maintenance related? Right now I am planning for snow removal, tree trimming and road maintenance. There are no other buildings on the property. My admin budget of $1,500 assumes some banking fees and accountant fees. I am not including any fees for an eviction but I am aware they may be needed if I have to evict a tenant.
I think you are missing several other expenses. How much are taxes? Gas and travel costs for you and your brother. Does the park have any lighting or utilities aside from what the tenants have in their names? Are you going to do any advertising to fill the empty spots? Are you going to try to buy homes and fill the spots? What is your debt service going to be? How old are the park lines for water/sewer? How prompt are folks on paying rent?
Lots of due diligence still to be done but maybe take 50% overhead to get an idea of actual NOI for the first year; always be conservative. You are going to run into many unanticipated expenses like clearing clogged lines, mailing or delivering reminders about rent. You might even have to have someone do some mowing or other maintenance. Call you insurance agent and they will give you an idea of things they will want done or ways to make sure the park is safe.
I wholesale parks so I generally try to list parks at 9-10% cap rate so if gross income is: $49,260 then 50% NOI = $24,360. at a 10 Cap then $243,600 is a fair price. Others value parks per space so 33 * 15k (or other multiplier, could be anywhere from $10-20k) = $495,000.
What is the price the Seller wants? Have the Seller throw out the first number and that will tell you how motivated they are and how he is evaluating his park. If he has solid books to show the actual income and reports everything for taxes then you can easily get bank financing; if they don't (they never do!) then you can use that as leverage for owner financing so you have time to buy and get a solid set of books for a refi. Remember, you're there to solve his problem; it sounds like he's ready to retire but still wants the income or does he 'need' the cash for medical or other expenses. Solve his problems (craft an offer that will work for him) and you can get a great deal. Good luck!
Belinda Lopez, Realty Investment Community of Houston | http://www.realestateforintroverts.com
Hello Michael. Expenses are real low for this property but you must know them to be accurate. Expenses on parks usually run 35 to 45% of revenue but hey- great at 14%...... I noticed you did not have taxes in there or management fees? Would your brother be the park manager? I think realistically expenses would be double what you have there- hence lowering NOI to approx 35k
With is in mind- please get rent rolls and exact expenses over the last 12 months. Need to know NOI before you know what a property is worth.
Also owned free and clear so seller financing should be an option of course. Based on a 10 cap at 35k NOI this would be worth 350k.
Make sure of NOI like stated and then you can use the 10 cap to evaluate the worth.
If rents can be raised even to 160 a month and get leases yearly instead of monthly- this would make the property be worth an additional 54k or so using the 10 cap.
Could be good value add deal for you.
Make an offer using seller financing- see if the seller would do it.
Low down- maybe a jv partner- for down payment- low interest rate where you can cash flow at a good DCSR.
350 SALES PRICE- 50K DOWN
LOAN OF 300K
PAYMENT= 3330.62 A MONTH
39,967.38 A YEAR.
THIS GIVES YOU 10K A YEAR PROFIT- OR 20% CASH ON CASH-
without raising rents.
DCSR = 1.25- decent.
This is just an example of how to structure the deal- one of the ways.
Good luck and hope this helps!
My mistake. Forgot to take out expenses from 49k.
Would have to rework note from seller-.
Like Belinda said- lots of factors here.
Owner financing the way to go and obviously the longer he will finance the better without balloon.
My apOlogies about NOI.
Belinda is right on. Realistic NOI on this might be closer to 30k.
Also never buy on projected NOI- buy on actual numbers.
The current asking is $365,000. I think there is room to negotiate as well. And yes I forgot to include taxes. The current owner pays $1,070 in taxes. The taxes would likely go up with the new purchase price (let's use $1,500 for a new number). The park has some lighting. After walking the property I think it is in very good shape and is one of the selling points to me. I am not going to buy any new homes. I will advertise in the Surrounding area and do much of the advertising myself but I should include $300 for an advertising budget. I plan to do the management myself for the first year with the help of my brother. I will be processing the rents and doing the books on Excel. I know it will be some work but I want to learn the process. I will go ahead and add another $4,000 for misc. expenses.
Adding $1,500 for taxes, $500 for advertising, $500 for lighting repairs, $4,000 for misc expenses, the new NOI is $35,760.
NOI of $35,760 at a .10 cap rate would value the park at $357,600?
I can likely manage a downpayment of $80,000 and possibly $100,000.
$49,000k gross less expenses of $20k (40%) = NOI of $29k at a 10 cap, that is worth $290k max and you have to factor in any deferred maintenance as well.
Based on a common quick evaluator for mobile home parks, the value comes out to be $247k plus the value of the owned mobile home and any additional land or structures. So it is fair to say this deal based on current income is worth between $250k and $290k. You can throw out all the other guesses.
Now, if you got obtain owner financing, that holds value to you or any other buyer so you can certainly make adjustments for that consideration.
Are the mobiles individually metered for water and power or is it included in the tenants rent? I would recommend doing some sales comps for parks in the area. You can find a fair value for the park by using the Income method and market method of appraisal. Sounds like you already have used the income method for the most part but it also might be a good idea to look at similar parks that have recently sold in the area and for how much. I would also recommend checking the condition of the mobiles in the park. If they are older or need maintenance you can bring this up in negotiations. Good luck
Thanks everyone for their input. Sounds like I have to get a better handle of expenses and NOI.
The property is in Ohio, near Columbus. Anyone familiar with that area?
I'll just mention that you'll want to take title in an LLC to contain liability from the park from your personal assets. Tax wise I could use the park owners to chime in. My guess would be to leave the tax status of the LLC to be "pass through". But since a lot rent only park is just land, which isn't depreciated, what are the tax benefits of MHP ownership being passed through to one's 1040?
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