What's your cap rate for mobile home park?

31 Replies

Hi BP,

    Can you share with me what your mobile home cap rate is?

  The one i'm looking at is a space rent only and does not own any of the homes.  There is also a 1,400 SQ ft stick built home on the property. 

What is a normal/average cap rate for a mobile home park?  I'm from the Seattle, WA area.  I would be interested to hear cap rates from other areas as well!

Thanks

No such thing as normal/average cap rate for mobile home parks. I would say though that a range for land lease only parks would be 8-12% caps. Park owned homes push the cap rate up from 10 to whatever the market will bear. Most probably sell from 12 to 20% caps depending on all the important factors. Water, sewer, underground utilities, age of homes, paved roads, etc. Sorry I can't give more but it is a fluid part of pricing.

Thanks @Howard Abell  I kind of figured that's the way it would be.  The one were looking at works out to be a 5.5% cap rate.  I think that might be off of gross revenue.  What would we need from the seller to determine if the park is reasonably priced?

First you need financials that you can have some faith in. Caps rate based on NOI so view the expenses critically. Verify income. Typical Due diligence issues. If you pay 5.5% cap rate you need your cost of money to be at least 1.5 to 2% below that to have a shot at making money over time. Better to have 4+ spread for safety.

@Jon H. buying a park at 5.5% CAP rate is crazy unless you are getting a park in California on the beach, otherwise IMHO you are being taken advantage of. You should be looking to buy around a 10 CAP with the ability to push values up to a 20 CAP. If you don't you will probably lose money on the park.

Originally posted by @Bruce M.:

@Jon H. buying a park at 5.5% CAP rate is crazy unless you are getting a park in California on the beach, otherwise IMHO you are being taken advantage of. You should be looking to buy around a 10 CAP with the ability to push values up to a 20 CAP. If you don't you will probably lose money on the park.

If you buy at a 10 CAP you are paying $100,000 for every $10,000 of NOI. Now if you "push values up to a 20 CAP" then that same $10,000 NOI is only worth $50,000! How are you making a profit there?

Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:

@Jon H. buying a park at 5.5% CAP rate is crazy unless you are getting a park in California on the beach, otherwise IMHO you are being taken advantage of. You should be looking to buy around a 10 CAP with the ability to push values up to a 20 CAP. If you don't you will probably lose money on the park.

If you buy at a 10 CAP you are paying $100,000 for every $10,000 of NOI. Now if you "push values up to a 20 CAP" then that same $10,000 NOI is only worth $50,000! How are you making a profit there?

You are talking about the value of the park. I'm talking about the return. If you increase the return so it doubles then you go from a 10 cap to a 20 cap, or am I looking at this the wrong way?

Originally posted by @Jon H. :

Thanks @Howard Abell  I kind of figured that's the way it would be.  The one were looking at works out to be a 5.5% cap rate.  I think that might be off of gross revenue.  What would we need from the seller to determine if the park is reasonably priced?

 A cap rate is not calculated off gross revenue. 

You need to see sales analysis of comparable properties to get a market cap rate to determine value.  More than likely it will be impossible to get this information.  Better yet why not ask the seller how they came to their valuation?

Originally posted by @Bruce M.:
Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:

@Jon H. buying a park at 5.5% CAP rate is crazy unless you are getting a park in California on the beach, otherwise IMHO you are being taken advantage of. You should be looking to buy around a 10 CAP with the ability to push values up to a 20 CAP. If you don't you will probably lose money on the park.

If you buy at a 10 CAP you are paying $100,000 for every $10,000 of NOI. Now if you "push values up to a 20 CAP" then that same $10,000 NOI is only worth $50,000! How are you making a profit there?

You are talking about the value of the park. I'm talking about the return. If you increase the return so it doubles then you go from a 10 cap to a 20 cap, or am I looking at this the wrong way?

Yes, you are looking at this the wrong way. The market determines the cap rate. Now if you are able to double the NOI and the market cap remains 10% then the market value is now $200,000 but you are still paying $100,000 for every $10,000 of NOI.

Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:
Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:

@Jon H. buying a park at 5.5% CAP rate is crazy unless you are getting a park in California on the beach, otherwise IMHO you are being taken advantage of. You should be looking to buy around a 10 CAP with the ability to push values up to a 20 CAP. If you don't you will probably lose money on the park.

If you buy at a 10 CAP you are paying $100,000 for every $10,000 of NOI. Now if you "push values up to a 20 CAP" then that same $10,000 NOI is only worth $50,000! How are you making a profit there?

You are talking about the value of the park. I'm talking about the return. If you increase the return so it doubles then you go from a 10 cap to a 20 cap, or am I looking at this the wrong way?

Yes, you are looking at this the wrong way. The market determines the cap rate. Now if you are able to double the NOI and the market cap remains 10% then the market value is now $200,000 but you are still paying $100,000 for every $10,000 of NOI.

 That's not what I'm talking about. If you buy at a 10 cap and double the value of the park you in essence own a 20 cap park because it only cost you $5,000 for every $100,000 of value. If you go to sell the park then yes, it would cost someone else more to buy the same park. I think we are talking about the same thing from different perspectives.

Originally posted by @Bruce M.:
Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:
Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:

@Jon H. buying a park at 5.5% CAP rate is crazy unless you are getting a park in California on the beach, otherwise IMHO you are being taken advantage of. You should be looking to buy around a 10 CAP with the ability to push values up to a 20 CAP. If you don't you will probably lose money on the park.

If you buy at a 10 CAP you are paying $100,000 for every $10,000 of NOI. Now if you "push values up to a 20 CAP" then that same $10,000 NOI is only worth $50,000! How are you making a profit there?

You are talking about the value of the park. I'm talking about the return. If you increase the return so it doubles then you go from a 10 cap to a 20 cap, or am I looking at this the wrong way?

Yes, you are looking at this the wrong way. The market determines the cap rate. Now if you are able to double the NOI and the market cap remains 10% then the market value is now $200,000 but you are still paying $100,000 for every $10,000 of NOI.

 That's not what I'm talking about. If you buy at a 10 cap and double the value of the park you in essence own a 20 cap park because it only cost you $5,000 for every $100,000 of value. If you go to sell the park then yes, it would cost someone else more to buy the same park. I think we are talking about the same thing from different perspectives.

No, cap rate=NOI/market value(sales price)

10%=10,000 NOI/100,000 market value

10%=$20,000 NOI/ $200,000 market value.

Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:
Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:
Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:

@Jon H. buying a park at 5.5% CAP rate is crazy unless you are getting a park in California on the beach, otherwise IMHO you are being taken advantage of. You should be looking to buy around a 10 CAP with the ability to push values up to a 20 CAP. If you don't you will probably lose money on the park.

If you buy at a 10 CAP you are paying $100,000 for every $10,000 of NOI. Now if you "push values up to a 20 CAP" then that same $10,000 NOI is only worth $50,000! How are you making a profit there?

You are talking about the value of the park. I'm talking about the return. If you increase the return so it doubles then you go from a 10 cap to a 20 cap, or am I looking at this the wrong way?

Yes, you are looking at this the wrong way. The market determines the cap rate. Now if you are able to double the NOI and the market cap remains 10% then the market value is now $200,000 but you are still paying $100,000 for every $10,000 of NOI.

 That's not what I'm talking about. If you buy at a 10 cap and double the value of the park you in essence own a 20 cap park because it only cost you $5,000 for every $100,000 of value. If you go to sell the park then yes, it would cost someone else more to buy the same park. I think we are talking about the same thing from different perspectives.

No, cap rate=NOI/market value(sales price)

10%=10,000 NOI/100,000 market value

10%=$20,000 NOI/ $200,000 market value.

So what you're saying is that everything I read in this book and what this entire book is about is wrong?

Originally posted by @Bruce M.:
Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:
Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:
Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:

@Jon H. buying a park at 5.5% CAP rate is crazy unless you are getting a park in California on the beach, otherwise IMHO you are being taken advantage of. You should be looking to buy around a 10 CAP with the ability to push values up to a 20 CAP. If you don't you will probably lose money on the park.

If you buy at a 10 CAP you are paying $100,000 for every $10,000 of NOI. Now if you "push values up to a 20 CAP" then that same $10,000 NOI is only worth $50,000! How are you making a profit there?

You are talking about the value of the park. I'm talking about the return. If you increase the return so it doubles then you go from a 10 cap to a 20 cap, or am I looking at this the wrong way?

Yes, you are looking at this the wrong way. The market determines the cap rate. Now if you are able to double the NOI and the market cap remains 10% then the market value is now $200,000 but you are still paying $100,000 for every $10,000 of NOI.

 That's not what I'm talking about. If you buy at a 10 cap and double the value of the park you in essence own a 20 cap park because it only cost you $5,000 for every $100,000 of value. If you go to sell the park then yes, it would cost someone else more to buy the same park. I think we are talking about the same thing from different perspectives.

No, cap rate=NOI/market value(sales price)

10%=10,000 NOI/100,000 market value

10%=$20,000 NOI/ $200,000 market value.

So what you're saying is that everything I read in this book and what this entire book is about is wrong?

 Yep!  Do the math.  I'll help you.

Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:
Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:
Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:
Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:

@Jon H. buying a park at 5.5% CAP rate is crazy unless you are getting a park in California on the beach, otherwise IMHO you are being taken advantage of. You should be looking to buy around a 10 CAP with the ability to push values up to a 20 CAP. If you don't you will probably lose money on the park.

If you buy at a 10 CAP you are paying $100,000 for every $10,000 of NOI. Now if you "push values up to a 20 CAP" then that same $10,000 NOI is only worth $50,000! How are you making a profit there?

You are talking about the value of the park. I'm talking about the return. If you increase the return so it doubles then you go from a 10 cap to a 20 cap, or am I looking at this the wrong way?

Yes, you are looking at this the wrong way. The market determines the cap rate. Now if you are able to double the NOI and the market cap remains 10% then the market value is now $200,000 but you are still paying $100,000 for every $10,000 of NOI.

 That's not what I'm talking about. If you buy at a 10 cap and double the value of the park you in essence own a 20 cap park because it only cost you $5,000 for every $100,000 of value. If you go to sell the park then yes, it would cost someone else more to buy the same park. I think we are talking about the same thing from different perspectives.

No, cap rate=NOI/market value(sales price)

10%=10,000 NOI/100,000 market value

10%=$20,000 NOI/ $200,000 market value.

So what you're saying is that everything I read in this book and what this entire book is about is wrong?

 Yep!  Do the math.  I'll help you.

 I think I'm done and thanks for the banter.

Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:
Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:
Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:
Originally posted by @Bob Bowling:
Originally posted by @Bruce M.:

@Jon H. buying a park at 5.5% CAP rate is crazy unless you are getting a park in California on the beach, otherwise IMHO you are being taken advantage of. You should be looking to buy around a 10 CAP with the ability to push values up to a 20 CAP. If you don't you will probably lose money on the park.

If you buy at a 10 CAP you are paying $100,000 for every $10,000 of NOI. Now if you "push values up to a 20 CAP" then that same $10,000 NOI is only worth $50,000! How are you making a profit there?

You are talking about the value of the park. I'm talking about the return. If you increase the return so it doubles then you go from a 10 cap to a 20 cap, or am I looking at this the wrong way?

Yes, you are looking at this the wrong way. The market determines the cap rate. Now if you are able to double the NOI and the market cap remains 10% then the market value is now $200,000 but you are still paying $100,000 for every $10,000 of NOI.

 That's not what I'm talking about. If you buy at a 10 cap and double the value of the park you in essence own a 20 cap park because it only cost you $5,000 for every $100,000 of value. If you go to sell the park then yes, it would cost someone else more to buy the same park. I think we are talking about the same thing from different perspectives.

No, cap rate=NOI/market value(sales price)

10%=10,000 NOI/100,000 market value

10%=$20,000 NOI/ $200,000 market value.

So what you're saying is that everything I read in this book and what this entire book is about is wrong?

 Yep!  Do the math.  I'll help you.

 Bob, you're killing me today!:) Great discussion.

I'd recommend listening to the 2 podcasts that BP had on trailer parks, and reach out to those members in a message. They're very insightful

@Vincent Crane Thanks Vincent that's a great idea! I will definitely listen to those again. I never thought I would even be interested in buying a mobile home park? I think I had those podcast on in the background as they weren't pertinent to my REI at the time. I guess now they will mean a lot more!

@Bob Bowling Bob, we will be looking deeper into the financials for NOI to calculate value. I had to make a quick judgment in my conversation with the seller when she asked 1.2 mil at 66,000 annual income...Gross/NOI? (I Dont know yet). My response was that a great mobile home park purchase would be at around 12-13%, average would be 10%, and thin return would be around 7%. She said she has some things to think about. I just went with my gut feeling at the time. Usually my guts right especially when I'm hungry :)

Definitely here on bigger pockets to understand how to decide on a cap rate, since it's just me and the seller figuring this out!  Now the many helpful people on BP

We will also be doing further research to verify market cap rates in the area were purchasing.

@Bruce May  Glad there's only 4 of you to thank or could be doing the @ thing for awhile :)

We will keep you posted on updates/questions as this deal originally came from a house we wanted to buy located in a different city.  The direction it's going now is buying the house and the park and making one monthly payment for both.  We have a bit more work to do after the seller and I agree on a cap rate!

Originally posted by @Jon H. :

 

 

@Bruce M.  I think there's some upside potential.  Park rents are one of the lowest in the county.  It would probably take a turn over of tenants for a significant rent increase.  We would prefer to retain the current tenants and gradually increase rents.  I think that would increase our cap rate and our value for selling.  Did I get that cap rate thing right? @Bob Bowling 

@Bruce M.

You may be able to increase your NOI and if the market cap rate REMAINS THE SAME you will increase your value. But the ONLY cap rate you can partially control is the one YOU MAKE when you purchase the property. And if the market cap rate is 12% and you don't know that and you buy at 10% then you just OVERPAID and have every local investor laughing and pissed at you because other idiot sellers will point to your sale and expect to sell at 10% and each investor will have to educate each seller that YOUR DEAL was based on your ignorance of cap rates and they need to sell at current market cap rates or wait until another unsophisticated buyer comes along.

Now as far as your upside, well every smart investor knows what the potential upside is. They will value the property using current market cap rate and the potential NOI LESS the actual costs and the risk costs to get there. AND that is why you have to see the analysis of the cap rate comps you are using. If you see a $100,000 NOI selling for $1,000,000 you might think a 10% cap is market. But if on analysis you saw that the buyer had to put in $100,000 for new gas lines/ sewer then the cap rate is actually 9%ish.

I really want you to understand this and not just rely on something that someone wrote in a book or posted on a web forum.  Plenty of bad information out there. I am willing to walk you through this.

Originally posted by @Bob Bowling:
Originally posted by @Jon H.:

 

 

@Bruce M.  I think there's some upside potential.  Park rents are one of the lowest in the county.  It would probably take a turn over of tenants for a significant rent increase.  We would prefer to retain the current tenants and gradually increase rents.  I think that would increase our cap rate and our value for selling.  Did I get that cap rate thing right? @Bob Bowling 

@Bruce M.

You may be able to increase your NOI and if the market cap rate REMAINS THE SAME you will increase your value. But the ONLY cap rate you can partially control is the one YOU MAKE when you purchase the property. And if the market cap rate is 12% and you don't know that and you buy at 10% then you just OVERPAID and have every local investor laughing and pissed at you because other idiot sellers will point to your sale and expect to sell at 10% and each investor will have to educate each seller that YOUR DEAL was based on your ignorance of cap rates and they need to sell at current market cap rates or wait until another unsophisticated buyer comes along.

Now as far as your upside, well every smart investor knows what the potential upside is. They will value the property using current market cap rate and the potential NOI LESS the actual costs and the risk costs to get there. AND that is why you have to see the analysis of the cap rate comps you are using. If you see a $100,000 NOI selling for $1,000,000 you might think a 10% cap is market. But if on analysis you saw that the buyer had to put in $100,000 for new gas lines/ sewer then the cap rate is actually 9%ish.

I really want you to understand this and not just rely on something that someone wrote in a book or posted on a web forum.  Plenty of bad information out there. I am willing to walk you through this.

 Bob, I appreciate what you wrote. I'm no idiot and I completely understand how to value commercial properties including capital expenditures that have to be factored in at the time of purchase. I also know that commercial properties are valued on the cap rate and that those rates fluctuate all across the country and even within the same communities and may affect the same property over time. That said, I'm always open to learning more and don't believe I will ever have a grasp on something 100%.

 My only point was to buy at the right price and to increase the value of the asset; that's it... nothing more. I used the premise listed in the book as a quick reference because it's an easy concept to grasp but see that it might not be the best way to state it.

Bruce, here is your statement that I was responding to, "

You should be looking to buy around a 10 CAP with the ability to push values up to a 20 CAP. If you don't you will probably lose money on the park."

I don't mean to call anyone an idiot, well except you know who, but I would say 95% of the people that post here are ignorant about cap rates.  And the thing is there are probably only 2-3% who will ever buy a property where cap rate knowledge is needed. 

LOL this thread is weirdly funny.  Me and my team have been to MHU boot camp and have read Frank's 10/20 book too.

10%=10,000 NOI/100,000 market value

10%=$20,000 NOI/ $200,000 market value.

From above is the core commercial investing principal. Don;t buy a commercial business (commercial is only a business, not a property) unless there;s expansion, or improvements or fixing something that's broke that can double the NOI. Do the improvements, then enjoy the doubled NOI or sell for double the price you paid. I think a point that was being belabored is, hopefully your cost to double the NOI was far less than your original purchase price. There by doubling the value via doubling the NOI and selling you'll actually be cash ahead. I hope the point was that sometimes the improvements can be crazy expensive, thus should not taken... oofda!

Originally posted by @Jon H. :

@Vincent Crane Thanks Vincent that's a great idea! I will definitely listen to those again. I never thought I would even be interested in buying a mobile home park? I think I had those podcast on in the background as they weren't pertinent to my REI at the time. I guess now they will mean a lot more!

@Bob Bowling Bob, we will be looking deeper into the financials for NOI to calculate value. I had to make a quick judgment in my conversation with the seller when she asked 1.2 mil at 66,000 annual income...Gross/NOI? (I Dont know yet). My response was that a great mobile home park purchase would be at around 12-13%, average would be 10%, and thin return would be around 7%. She said she has some things to think about. I just went with my gut feeling at the time. Usually my guts right especially when I'm hungry :)

Definitely here on bigger pockets to understand how to decide on a cap rate, since it's just me and the seller figuring this out!  Now the many helpful people on BP

We will also be doing further research to verify market cap rates in the area were purchasing.

@Bruce May  Glad there's only 4 of you to thank or could be doing the @ thing for awhile :)

We will keep you posted on updates/questions as this deal originally came from a house we wanted to buy located in a different city.  The direction it's going now is buying the house and the park and making one monthly payment for both.  We have a bit more work to do after the seller and I agree on a cap rate!

Jon, Feel free to share the deal specifics for a bit better valuation. Number of spaces, utilities,  (Market would be good but probably better not to post but will have significant bearing on price) .  Number of POH, Number of spaces, utilities, who pays them etc etc. This way we can get a good grasp on what this thing looks like along with pricing/ terms to see if it has merit of further pursuit.  Market rents relative to your park rents would be good to know as well for any potential upside ,

Every property and investor situation is unique.  Institutional and investors who deal in volume use these formulas to quickly make a decision whether to delve further or pass.  Do they miss some deals along the way?  yes but for smaller (in terms of volume) investors they often only have the one deal and can spend an agonizing amount of time trying to make it work when others have passed.  Just saying the big difference could be that this particular property is in your back yard.  That could make managing and other expenses lower b/c of your local contacts or b/c you can do some of the work yourself.

The numbers aren't going to change on purchase unless you can get it at a return that makes sense to your situation.  I will say that having a prior owner on-site can be a mixed blessing.  Is it possible to split out that piece of the property and put it in a life trust?

We've also seen some prior owners try to do rent collections once they've sold a property!  Or a manager can 'raise' rents with the extra going into their pocket and not yours. Figure out a way to run the Park like a business and train your tenants to follow the new Sheriff's rules.

Take advantage of those experienced investors here who have offered to help you analyze this one privately.  They will ask questions you didn't think to and uncover potential problems and costs that you could pay a consultant to help you with at a rate of $125/hour or more.  That's what one local 'guru' charges to help analyze deals.  Good luck to you!

I'm getting ready to wholesale a MHP, and after reading above, I am now more confused about CAP than I have ever been:

Purchase: $535,000
Cash Flow: $8,000/mo
Expenses: $3,600/yr (CRAZY, but true)
Maintenance: $1,200/yr.

(All mobile homes are park-owned, comes with 12 acres, and 2 stick-built houses (3/2 and 3/1)  Utilities are all paid for by tenants, roads are maintained by city, water is well water...)

I originally thought cap was 18% but there are 2 ways to calculate CAP.  So, from what I read above, my buyer's CAP will sit at 17%?

There is one missing ingredient in the analysis, which is what the park will do when steered by a different owner. Case in point, the park we bought in Kankakee, Illinois. The prior year NOI was ($38,000). Out first 12 month NOI after closing on it was +$270,000. How did we get the $300,000 per year swing? The former owner had payroll of $250,000 (which we fired and replaced with a manager for $30,000) and the rest was through raising rents and getting on-line a few vacant park-owned homes. At about a $1.3 million purchase price we look like geniuses today (20% cap rate in year one) but also idiots based on historical (a negative cap rate). So in some turn-around deals where you control all the pieces, like firing staff or raising rents, you can pay cap rates as low as 0%. But that's only when you know what you're doing, and that's why we did not include that in the 10/20 book shown above, as we were afraid people would misunderstand and bankrupt themselves. Cap rates are a fraction of the NOI over the deal price. If you make huge adjustments to either the upper or lower part of the fraction, the impact is huge -- both good and bad. If you buy a deal at a 10% cap rate and have to put in a ton of capital improvements, you might drive it down to a 5% cap rate. And if you buy the park at a certain NOI and then double it, you double the cap rate. But that's risky stuff and not the best idea on your first park. For a first park, strive for what we call "stabilized with upside" which means a nice, safe, liquid park that you can still boost the NOI based on annual rent raises and filling some lots. Leave the extreme turn-arounds for later.

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