When analyzing MHP deal why multiply by 7?

8 Replies

I realize you usually take 10% CAP into account. How do you figure out the specific market CAP? Like in CA there are probably different CAPs in different counties. San Jose will be different from Redding. Why multiply by 0.7?

Each market might have its own cap rate, but the cap rate is always calculated the same way. Take the net annual income divided by the market price of the property

So if you are looking at a MHP that nets $50,000 annually and commercial properties in that area are trading at a 7 cap, you can calculate the proper offer/purchase price by dividing $50,000 by 7%.

50000 / .07 = $714,285

If you have the purchase price to start with and you know that you want a 7 cap, all you have to do is multiply the purchase price by .07 (7%) to get the target net operating income.

$714,285 * .07 = $50,000

Hope that helps.

The use of the 7% as you direct your question to with all things considered is probably a rate at which most people would think or calculate the cost of the property would make good financial sense although this is definitely not the only figure you will want to account for or address. Remember commercial property valuations are based on income levels and not necessarily comps as in smaller residential buildings. 

@Rina Amir

 Not sure I understand your question. If you are working with an agent they should be able to provide you with the sales that happened in the last few months in your target area that can help.

Also 10% cap may be good to shoot for but may be not possible in all markets. I am in San Jose but not familiar with Mobile home parks not sure what the caps are for those.

@Radhika, my question is specific to MHP since the general quick calculation is # of occupied units x rent x 12 x 0.7 x 10 cap = offer

@Radhika M. Is correct in leading you to market cap rates.  Some parks are rent controlled so you would want to be sure that the comps match your property.

@Rina Amir

Based on the formula you posted above and that your goal is 10% cap my guess is that they expect the expenses to be about 30% of rent collected so they expect the NOI (net operating income to be 70% of the rent collected) and so they multiple by 0.7

Hopefully somebody who knows more about MHP investing will post. Good luck to you.

I think @Radhika M. is correct that it is an assumption of NOI, but that is nothing but a guess. I would get financials from the current owner or management company. Look at the actual NOI and divide by .1 to figure a selling cost at a 10 cap.  There are many other things to consider beyond cap rate.  Remember as cap rate goes up, so do your troubles.  

@Rina Amir

@Radhika M. is correct with her guess in that the equation you're using is assuming 30% expenses, leaving 70% of total income as NOI. Then you'd apply the 10 CAP (or whatever CAP you're assessing).

Assume a full 50 lot park, $200 lot rent, 30% expenses:

50 * 200 * 12 * .7 / .1 = $840,000 rough valuation

However, I need to stress that is used as a guide to cull the parks priced way out to lunch, and many variables go into this assumption and 30% expenses are usually applied if the park has all tenant owned homes, with tenant paid city water & city sewer.  Expense assumptions should be a lot higher otherwise.

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