MHP Deal Analysis Seeking Review

7 Replies

Hello All!  This is my first post on bigger pockets.  I was wondering if I could get some feedback from seasoned MHP investors on the following potential deal:

21 Owner Occupied Lots @ $225-$235 

5 Rentals Units @ $295-$365

22 Vacant Lots 

1 Stick Built Home Sold on Contract @ $595

Average Monthly Income: ~$7,005 which equates to ~$260 per lot

Gross Income Income: $84,060 

Expenses:

Landscaping / Maintenance: $8,350 (9.93%) 

Insurance (liability only): $250 (0.30%) 

Real Estate Taxes: $8,400 (9.99%) 

Utilities: $2,700 (3.21%)

Administration: $1,800 (2.14%) 

Waste Management: $4,600 (5.47%) 

Total Expenses: $26,100 (31.05%) 

Net Operating Income: $57,960

Assuming a 10% Cap rate the value of this property today would be $579,600. 

The MHP is almost 40 years old and made up of mostly single wide trailers. The MHP has 2 wells and its own septic system. Do you guys see any red flags and what would you offer for such a MHP?

A few things stand out. The rentals are getting very little above lot rent and will bear a larger proportion of the expenses. That suggests raising the cap rate  above 10? You might comp the rental rates in the area for both lot and rentals to see if that is where the market is.

The stick built income will be gone but you do not say when. The fact that you have no public sewer and water and can be a big issue down the line. I will cut it short but I think you need to revise the cap rate you are willing to pay

Originally posted by @Jason Harper :

Hello All!  This is my first post on bigger pockets.  I was wondering if I could get some feedback from seasoned MHP investors on the following potential deal:

21 Owner Occupied Lots @ $225-$235 

5 Rentals Units @ $295-$365

22 Vacant Lots 

1 Stick Built Home Sold on Contract @ $595

Average Monthly Income: ~$7,005 which equates to ~$260 per lot

Gross Income Income: $84,060 

Expenses:

Landscaping / Maintenance: $8,350 (9.93%) 

Insurance (liability only): $250 (0.30%) 

Real Estate Taxes: $8,400 (9.99%) 

Utilities: $2,700 (3.21%)

Administration: $1,800 (2.14%) 

Waste Management: $4,600 (5.47%) 

Total Expenses: $26,100 (31.05%) 

Net Operating Income: $57,960

Assuming a 10% Cap rate the value of this property today would be $579,600. 

The MHP is almost 40 years old and made up of mostly single wide trailers. The MHP has 2 wells and its own septic system. Do you guys see any red flags and what would you offer for such a MHP?

 

Just some general observations on this.  I would look at the market .  As Frank and Dave say you want to be in a MSA area of 100k plus, house price over 100k, good 2 bed rents in proportion to your lot rent price.  Since this park is half empty, is it because there is no demand in the area? Your landscaping cost seems high but it could be that you have a bit of additional land you have to pay to mow, or maybe its included in the rent.  Your insurance is going to run you more. The park is on well and septic. Your proposed expense do not include repairs/reserves for those.  Your Admin wouldn't be enough to offset a manager cost. 

Now here is my personal feeling which i can be wrong here.  But when a deal like this comes about you have to buy them so on the cheap it would not make sense otherwsie.  I don't think you would find a buyer in a million years to pay you a 10 cap on this property ( granted we don't know the market so maybe you are in a super great spot with below market rents by 200) .   

Also, the note people would have to chime in on the house but you have to provide more info like the note balance, rate, seasoning etc.

I feel like it will not have any liquidity when you go to sell so you have to buy it enough that it cash flows so well which is your hedge from not being able to sell easily.  I could be wrong on this but thats almost my automatic assumption on a smaller park  on septic and well.  


Quick math on lot rents running at a 50% expense ratio and using a 10 cap value is looking like 350k.  So you would have to substantially below that maybe a 15 cap at 230k.  Really though its good to look at a lot of deals until you get a grasp on it but unless there is a reason you are in love with it or you get it for a song, there are better opportunities out there. If its local to you and you really like it just keep some of those things in mind. 

Originally posted by @Howard Abell :

A few things stand out. The rentals are getting very little above lot rent and will bear a dlarger proportion of the expenses. That suggests raising the cap rate  above 10? You might comp the rental rates in the area for both lot and rentals to see if that is where the market is.

The stick built income will be gone but you do not say when. The fact that you have no public sewer and water and can be a big issue down the line. I will cut it short but I think you need to revise the cap rate you are willing to pay

 @Howard Abell:

Great catch on the rental MH's getting very little above the lot rent.  I will need to look into the expenses and the rental rates in the area.  As far as the land contract for the stick home as of now all I know is that there is a balance of $44,000 and is included in the sale of the MHP.  I would assume the $595/month includes principal and interest so there is ~74 months left on the contract. 

Originally posted by @Jack Baczek :

Just some general observations on this.  I would look at the market .  As Frank and Dave say you want to be in a MSA area of 100k plus, house price over 100k, good 2 bed rents in proportion to your lot rent price.  Since this park is half empty, is it because there is no demand in the area? Your landscaping cost seems high but it could be that you have a bit of additional land you have to pay to mow, or maybe its included in the rent.  Your insurance is going to run you more. The park is on well and septic. Your proposed expense do not include repairs/reserves for those.  Your Admin wouldn't be enough to offset a manager cost. 

Now here is my personal feeling which i can be wrong here.  But when a deal like this comes about you have to buy them so on the cheap it would not make sense otherwsie.  I don't think you would find a buyer in a million years to pay you a 10 cap on this property ( granted we don't know the market so maybe you are in a super great spot with below market rents by 200) .   

Also, the note people would have to chime in on the house but you have to provide more info like the note balance, rate, seasoning etc.

I feel like it will not have any liquidity when you go to sell so you have to buy it enough that it cash flows so well which is your hedge from not being able to sell easily.  I could be wrong on this but thats almost my automatic assumption on a smaller park  on septic and well.  


Quick math on lot rents running at a 50% expense ratio and using a 10 cap value is looking like 350k.  So you would have to substantially below that maybe a 15 cap at 230k.  Really though its good to look at a lot of deals until you get a grasp on it but unless there is a reason you are in love with it or you get it for a song, there are better opportunities out there. If its local to you and you really like it just keep some of those things in mind. 

 @Jack Baczek:

Thank you for the very detailed analysis!  A few points of clarification: The original analysis is directly from the buyer.  The expenses explained are his expenses for 2014.  I agree that the management expense would not be enough for a full time manager.  I would need clarification on that line item from the seller.  In your experience what is a fair wage for a park manager?

The original expense ratio given by the owner was 31%. Following your quick math you suggest a 50% expense ratio and a 10 cap value and came up with a valuation of $350k. I don't follow your math here could you please explain? The gross operating income (per the owner) was $84,060, @ a 50% expense ratio I calculate a NOI of $42,030. A 10% cap rate provides a valuation of $420,300. Keeping the same numbers at a 15 cap I calculate a $280,200 valuation. What am I not accounting for?

The seller is motivated and is also offering seller financing (terms unknown at this time).  His initial asking price is $325k, equating to a cap rate of 17.85% [($84060*.69)/$325k].  Would a 50% expense ratio be out of line to use in a counter offer with a 17.85% cap rate (i.e. a valuation of ~$235k)?  Would anyone do that deal?

@Jason Harper

I take it you mean direct from seller right? Without actually seeing the actual break out of everything , we can only make assumptions.... So I'm assuming Waste Management is garbage, are there charges for having tanks pumped out ( possibly under maintenance) . Is he working for free? If so remember you will have to pay someone to those things if you will run this as an investment and not a job. Is there a cost for snow plowing ( maybe under landscaping maintenance) . Smaller parks will typically run at higher expense ratios since your fixed costs aren't able to be spread all over. Say you have this one park in an LLC and you file a return on it , that might not be included here. If you have to use an attorney for 1 thing, thats on 26 lots and not 65 lots. If you have to buy a plane ticket and stay in a hotel , thats 700 bucks. So you have to look at it the way you will run it , but don't kid your self and have the numbers believe what you want. If you have to install a new well, that might be zero this year but next year it would not be zero. Roads? Cost on doing those ? My point is sellers can lie. And even if they are honest don't listen to what they say, look at it from a business perspective.


On the Frank and Dave model, you might give free lot rent , 10 per occupied lot, and 15 per park owned home lot.  Its really not a tremendous expense but that is a strength of their model ( low cost).  But there area a lot of things that would fall back on your shoulders then ( important things etc that the park manager could not take care of).  You then are your centralized management system, and if you grow you would want to get other people to replace those duties. 

So my math is 26 lots @ 225 a lot =5580 a month , annualized is 70,200 at 50 % expenses is around 35 a year.  When the guy charges that little for a home above lot rent, they might be junkers, but there is no " spread " there.  He might spend 2k to do a rehab after 1 year and only got $840 in rent for the home portion ( not lot).  So be being in the homes business at those numbers, he has the privilege of only losing 1,160 on each home annually ( again an example for perspective ) . 

Be careful about seller financing.  I did not make that point before but there will probably be no other way to do this deal.  He HAS to do it so don't let him think he is doing you a favor. But terms can "cloud " your judgement and value the deal on its own merit. 

Again, I would ask what your goals are on this park. I think the exit will have a big question mark on this park ( and I'm assuming you will have to carry to your next buyer when you go to sell.  ( if you get the occupancy up and get seasoned operating statements , maybe you can start looking at other avenues but I'm not sure).  I really don't think the liquidity to be there .  So the question would be, does that number make it worth it for you knowing the possible outcomes for the return you generate in the mean time. 

As an example, we just looked at a park that was not too far off from this.  21 tenant owned homes , lot rent 300. On well and septic ( but here we actually had a possibility to tie onto city sewer making it much more desirable potentially).  Handful of empty spaces. This park they were looking for 200k so that was an 18 cap but we did not do anything with it at this point. 

Whatever you end up doing, take the MHU bootcamp, or at a minimum, buy their home study course to help navigate the waters of parks as I would recommend buying a city sewer and city sewer park if possible for park 1.

Also, don't get me wrong about parks like this, if you just want something close by home and strictly for the cash flow , this could be something for you. If he is doing seller carry, the better terms you can push for your self ( i.e. 5% down , fully amortized over 20 years, no recourse), it makes the opportunity look a lot more interesting since you would not have much to lose. 

 @Jack Baczek :

Thanks again for such a thoughtful post chocked full of great information and things to look for. To answer your question directly: "What are your goals on this park?" My goals are to find a MHP with reliable cash flow with the ability to increase cash flow (60% vacancy). I know it might be tough to get new MHs into this park and I agree the quality of the mobile homes are probably well below average. Great point on exit strategies.  It would not be ideal if when I go to sell the MHP I would also have to carry the note.  This would be my first MHP so maybe this one isn't for me but the advice I am getting from people like you is very valuable.

@Jason Harper

Ironically the "quality" of the homes does not have to be there.  Older homes are perfectly fine and preferred especially if they are seasoned tenants.  You want to look for pride of ownership where people care about their area.  Sometimes that might not be the case if the park has been let go for a long time.  But at least here you do not own most of the homes. 

You will definitely want to see what the city regulation would be to get homes into the park ( verify how many spaces its zoned for etc).  

Look at lots of deals,  read everything on the MHU forums you can, do the bootcamp and you will be as ready as you can be to buy a park.   

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