Cash only investing in Mobile Homes - My plan

[Bobby Mitchell]

Hi All,

First time posting on here but I have been an avid reader of the forums for a couple years. Great learning tool.

I invested in single family homes in Houma, Louisiana from 2006-2009 and did okay, a couple rehab/flips and a couple rentals and it was profitable; however I never like the fact that I owed someone a note, in this case the banks. I also found myself using credit cards for repairs and I never felt good about that either. In 2009 I move out of state and sold all 4 homes and haven’t been back in real estate until 2014. I just didn’t have the time.

I now live in Poplarville, Mississippi a small town with a community college. The market is not hot by any stretch of the imagination, but I have noticed a lack of rental properties and the college is growing quickly, so I'm hedging my bets on future needs. I am fortunate to have a good salary and low level of debt at this time in my life, which affords me the cash that I am using to invest in real estate, specifically mobile homes.

I formed an LLC and bought 4.3 acres of undeveloped land for about $13,000 cash last year. Due to county restrictions I can only place 4 mobile homes on this parcel, but I'm not too concerned, each home will get 1 acre giving it a more family atmosphere, which is good in my area.

Water is city but sewer is individual septic tanks. I have someone to develop dirt pads, gravel driveway, place septic’s and run power. I have quotes and all will cost me about $5000 per home.

My budget for purchasing homes is $20,000 each including the moving expense if possible, this is the top price I will pay and only vinyl siding and shingle roof will do, also it must come with central heat & a/c and appliances. The market for homes in my area is very good and prices are fair, it also helps that I am in no hurry and I have cash. This lets me wait out owners, as we all know financing on older homes is almost non-existent.

Last week I purchased the first home, a very nice 2 bed / 2 bath for $14,000 cash, $2200 to move it and $5000 to get it rent ready (water, power, septic), it will be ready in one month. Next month I have my sights set on a 3 bed / 2 bath for $18,500 cash with same expenses.

When I’m done next year at this time I will have (3) 3 bed / 2 baths and (1) 2 bed / 2 bath. Rent will be $650 for 3 beds and $550 for 2 bed. For a monthly gross of $2500.

My total investment in two years will be about $102,000 on the high end.

Breakdown of returns:

Gross rent - $30,000

Expenses - $6700

NOI - $23,000

Cash on Cash return = 23% first year

CAP Rate = 22.55

Gross Rent Multiplier = 4.4

Estimated property value upon completion of $162,000

Cash is king right? With cash purchase only upfront and no debt my long term ROI is looking pretty good!

The best part is I have all my money back in 4 years and I’m debt free!

I’m putting this out there for you guys to punch holes where you see any weakness. So am I missing something or is this a solid plan?

[Chris Reeves]

The problem with your plan - OP - is that you are:

1 - pumping approx $80,000 into depreciating assets (mobile homes, which will depreciate steadily all the way down to being near worthless) - real estate investing is predicated on a foundation of assets which at least hold value.

2 - grossly underestimating your long term expense ratios

The land you purchase and the capital improvements you make on it (pads, infrastructure) will hold value - the homes themselves will not. So to calculate a real return you had better factor in the reality that your homes will rapidly lose their value.

Thus a large part of your projected cash flow is a return OF your capital not a return ON your capital - i.e. you are gradually liquidating your own business.

If you were buying near-worthless old homes for much less money, and buying land already developed as pads, to get your lot rent - that would seem to make sense. But the way you have this structured I think your cash flow is going to disguise the fact that 10-15 years from now the homes will have eaten up much of the value of your project.

And if you are planning on keeping those homes as rentals (i.e. you own them ) then your expense ratios are way out of wack with industry norms.

You also have not broken down your estimates of gross income by homes vs land. Your model is far too simple.