What's your cap rate for mobile home park?

[Jon H.]

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

[Frank Rolfe]

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.