Mobile Home Park Valuation / Purchase

23 Replies

I'm looking at a mobile home park (new to mobile investing) The park has 8 units and owns all the units. Three years of financials shows 61K of gross income and 36K of net after all expenses. I think I'm getting a good deal at 340K but according to the formula above it should be valued at 306K. At a 340K purchase price it cash flows very well...am I missing something?

I just learned about the mobile home investing boot camp. I am interested in doing that but when I went to log on it didn't show any dates or locations. I'm reluctant to sign up if I don't know when and where it will be. Does anyone have any more info?

Jason,

Contact Brandon Reynolds. He can give you all the details for the next class, which I think is in South Carolina in September. I highly recommend the class if you want to buy a MHP. I recently attended for the second time and I'm still looking for the right MHP to buy, so by no means am I an expert at this.

As for the park you are considering buying, it really looks like you are overpaying. There are a couple of factors you have to consider. First, value the homes at about $5,000 each or $40,000 total, maybe a little more if they are newer and in really good shape. More than that and you over paying for the trailers.

Next you have to factor in the lot rents. You didn't mention how much the lot rents are, but with your numbers it looks like each tenant is paying about $635.00/mo for rent (trailer & space rent combined). The basic formula is: # of units X 60 X lot rents to give you a basic value at a 10% CAP rate. You shouldn't include the rent payed for the trailer, just the space rent. So if your 8 lots rent for $200.00/mo it would be 8 X 60 X 200.00 for a value of $96,000. Add that to the $40,000 and you should only be consider a purchase price in the ballpark of $136,000, give or take. You might be paying 2.5 times that for this park.

If the tenants pay for their own utilities you change the "60" in the formula to "70". Be careful with septic and wells as well. There's a whole lot more to consider, but know that MHP's are not the same as other asset classes.

Good luck, Bruce

Bruce,

Thanks for taking the time to respond.  I saw Frank Rolfe in another thread use a formula of rentsX12X.5X10 as a valuation which gave me the $306k.  I am still a little puzzled at this calculation and yours because the great cash flow potential is getting just passed up.  If I were looking at this as an apartment complex it would be a no brainer at $340K.  It doesn't hit the magic 2% monthly rent of purchase price, but it is a lot closer to that than most rentals.  The three year financials are solid and I am finding that mobile repairs are cheap and there are always used ones to find to replace them as they age that are cheap.  I am still puzzled as to why you don't count the rents from the units?  The bank is counting them and is willing to finance on this deal with 20% down. 

I have no idea what you mean by 10% CAP rate?

It cash flows in a "worst case scenario" year at about $16,000 after any and all expenses.  Trust me I combed through all of them and I can't figure out a reason not to go forward.  It may not be the most ideal, but it performs better than most stick built multi families in my area.

Thanks Jason

Jason, I have never heard of the formula you presented but I'm sure there are multiple ways to determine the value. The one I provided is the one Frank taught in the class. I've been taught the same formula in other classes I've attended as well. If you have a bank willing to lend then I think that's great. My understanding is that most banks will only consider the lot rents when making a loan.

CAP rates are how commercial properties are valued. A 10 CAP means you would receive 10% return on your investment. The lower the CAP rate, the higher the value, which seems inverse to our thinking. Do a quick internet search about CAP rates and you'll get a better explanation that what I could give you here.

Finally, for about $300 you can submit a park to Frank for evaluation and he'll give you a review of it and let you know if it's work buying. Here's the link:

http://www.mobilehomeuniversity.com/mobile-home-pa...

Thanks, Bruce

Jason,

I think you would have to look at several factors that we dont know about.  Is the property in an area where the land would be significantly appreciating?  How old are the mobile homes you currently have on this land?  I look at financing larger MHPs and we are looking at the condition of the park (prefer 4 and 5 star), the location of the park, how is management running the park.  When you are calculating the expenses, do you have a management fee built into those expenses?  I have seen investors who buy a property and make there money by saving the management fee.  They just bought a job instead of an investment.  Let me know what you decide to do.

Mark

Thanks for looking at my info.  The park sits on four acres in an area that is appreciating due to it proximity of commuting to both Seattle and Portland. Tribal casinos / resorts are also a big plus to the areas growth.

The park management fees are already included in the expenses on my first post. It has 8 units that gross $5100 per month and each one is rented based upon size and condition. Seven of them are single wides and there is one double wide. The park was originally designed for 12 units but only 8 were installed.  Supposedly the county changed some zoning so no more can be added above the 8, but appealing that is an opportunity. It has the infrastructure for 4 more mobiles. The oldest mobile is late 70's with most of them 80's vintage and the double wide 90's.

I see another opportunity in replacing the single widest with doubles and increasing the rent. The thought crossed my mind as well to sell the mobiles to the tenants and then rent the space like a more traditional park?

Thanks for your time.  Jason

Originally posted by @Bruce May:

CAP rates are how commercial properties are valued. A 10 CAP means you would receive 10% return on your investment.

This is not correct. A CAP rate is the ratio of the operating cashflow (money leftover after you pay for everything other than principal and interest) over the purchase price.

Your ROI can be quite different than your Cap Rate, based on how you have financed the property, and how much money you've put down into the property.

Good catch Andrew,

Cap rate would be NOI/purchase price

Cash on cash would be cash flow after debt service and expenses/down payment and closing costs.

IRR would include depreciation, appreciation, cash flow, and principal paydown.

Mark

After looking up the calculation method it looks like I would be at a 4.7 CAP rate at the 340 purchase. I don't see a 10 CAP rate as realistic with this deal and it seems mythical to find it anywhere else. Are other multi families going for a 10 CAP rate? What do you guys think about a 4.7?

I appreciate your patience

@Jason Graham a 10% cap should be a min for such a small park and as mentioned above you should only cap lot rent with a suitable vacancy factor and less park expenses. The value in the $140k seems more inline with true value. Never put much value against park owned homes (that is a different business all together).

I think you calculated your cap rate wrong to get 4.7. You stated the net was 36k, and the price is 340k. If that is the case, your cap would be 36000/340000 which would equal about a 10.6 cap rate. 

Thanks Austin.  I threw in the debt service for 80% down - without that and your calculation is correct.

I got it under contract for 360. The seller agreed to a subject to sale and to carry the rest at 6% with only $20k down. I found I can increase rents by $9k per year with modest improvements and from talking to state officials I can add 4 more mobiles without dealing with the county. Scheduled to close 10/1.

Thanks for your help

Congratulations @Jason Graham . I love that you found a way to make it work and have room to grow.

This post has been removed.

Typo here, sorry.  How does one delete a posting from BP?

Originally posted by @Jason Graham:

Thanks Austin.  I threw in the debt service for 80% down - without that and your calculation is correct.

Jason - congrats on the purchase.  I hope it works for you!  Just a quick one on Cap Rate: the purpose of cap rate is to give you a sense of the financial performance of the asset *regardless of its financing structure*.  In other words, Cap Rate is the return on investment as if you'd purchased it with 100% cash.  So saying that you threw in the debt service to determine cap rate does not make sense.  Once you throw in debt service, you are now calculating Return on Investment, which DOES take into account the financing structure. 

Again, congrats on the purchase.  Hope it's a home run for you!

Jefferson, I am not sure what to say except that your numbers are all off. My numbers come from three years of tax returns and it is assessed at $410,000.

Maybe the post was a typo? I do appreciate the feedback though.

To update though the seller balked at my subject to paperwork. I am working on structuring a new deal with the bank, but I don't have it under contract yet, just a verbal agreement.

I found this post while researching how to value a small mobile home park.  How did it turn out?  The deal I am looking at is very similar.

@Jason Graham what Jefferson Lilly (who owns or operates some large number of parks) was saying in code phrases is:

- a park that is self managed does NOT show dollar expenses in some bank account or tax return for:

- a manager.  You will incure this expense after you buy unless you self manage and work for free

- book keeping.  Self managers usually keep their own books, something you probably won't do.

- mow grass and fix minor problems.  You'll be hiring a service and handyman.

- etc

Just giving examples of what Jefferson ment by "expenses are totally falsified" or to that effect.  For park owned homes you have to figure at least 50% expense ratio.  Toss what ever the seller is giving you including tax returns because of avoided expenses YOU will incure. and use at the minimum 50% expenses.

The term for the cash left over after debt service is; free cash, which divided by cash it took to close [earnest, due diligence (phase 1, survey, appraisal), closing costs, and down payment], the result of this division is Cash on Cash perf.  My buying criteria is at least 25% cash on cash.

@Jason Graham Assessed for $410k   You may not know that appraisals are basically "bought".  There I said it.  LOL  As a seller you hire an appraisor and you tell them the income before expenses is $100k lets say.  Never mind that is rent from homes, not just lot rent.   The appraisor comes back with an appraisal that "cap rates home rent price".   (which is way high often by twice or more).

Then you go for financing and the bank hires another appraisor and the standard for lenders (and smart buyers to calc the offer price) is to cap rate lot rent only.  So lets say of the $100k income oly $40k is lot rent.  Now subtract off just expenses related to mananaging the lots (not homes) and now you have a appraisal price this is much lower, often dramatically lower.

The standard offer is to offer no less than 10 cap, no less than 30% expense ratio and income just from lot rent or the area prevailing lot rent if its a park owned home park.

These deals often wast time and due diligence expenses just get get the banks appraisal and it's way (sometimes way way) low.

I suggest you re calc the park value based on lot rent, 30% expenses and 11 cap.  It'll be low but negotiate up to 10 cap.

I realize this is an old thread, but hopefully some folks are still monitoring.  Does anyone have a purchase agreement for a MHP that they can share?  Even better something in Word format so I can edit.   I have a potential MHP, deal and could really use some help. 
Thank you in advance

@Jonathan Jewell , I recommend using a broker for your first deal any time you're entering a new category. They can walk you through the process and help with the due diligence, too. 

Would anyone be able to recommend a title company that has experience with mobile home parks located in Texas?  We are in Houston and the park we are moving forward on is in North Texas.

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