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
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.
Yeah, it does kill the value. You are going to be the one that adds the value - you should. More so, you are buying a liability with the park owned - that rent doesn't support the additional repairs and maintenance. If they move out, you are on the hook to get it fixed up. Is the 200-300 above the lot rent or is that included? City utilities?
No, the 200-300 is the monthly rent she charges on the 8 park owned & rented MH's (depending on circumstances at the moment between the owner and the tenant as to if she charges the 200 or the 300). The $150 is the lot rent, solely paid by 3 the privately owned MH's. She's been very relaxed with the tenants and they've taken advantage of it, but then they cut her grass and maintain the mobile home (to some degree) that they're renting. It's not a good business dynamic but the park definitely has a lot of potential. As for any utilities or amenities included - nothing is included. Everyone pays for their own utilities and they split the garbage dumpster fee. Owner of course pays property taxes (and hopefully has the liability insurance).
I think it has a lot of potential due to: room to grow the current rents to market value, remodeling units slowly & offering them for sale (maybe? good idea/bad idea?) and of course, adding additional MH's in all the 9 vacant/improved lots. I'm just trying to assess the value today, verses it's true potential.
Another concern here is her age and her children. IF she did agree to owner finance, what's the best way for me to protect my deal from lawsuits later with her 5-8 children? So far they have only been involved enough to tell me $450,000 PP but then didn't want to meet me at the MH park or anything. If the park is only worth 100-150k now (because of the low rents) and she agrees to owner financing, and I step in and bring it up to par (increasing the value over double) maybe 300k based on increased rents to 450, I don't want them to come back and take it away and accuse me of taking advantage of Grandma, when the truth is I straightened out the park.
@Frank Rolfe totally agree
@Tonya Toomey I agree that this deal has a lot of potential. Here is how I see the deal;
I treat the MHP and the POHs as 'separate' transactions since you aren't buying a mobile home apartment complex but a MHP that owns some Mobile homes.
Assuming a very conservative expense ratio of 45%, a 10 Cap Rate, and assuming you get the free renter to start paying, the park is worth $117,000 ( $150 lot rent* 14 lots*12 months*.55/ 10) Cap.
I have no idea what the homes are worth, but using a SWAG of $5,000 each you'll have $50,000 worth of Mobile homes.
using those two numbers, the park is worth $167,000.
The next question to ask are 1. what will the NOI be when you manage it, 2. how much will it cost you and 3. how long will it take you?
1. Lets say you cut expenses by 10%, raise lot rents to $200, and bring those nine pads to fruition. You'll have a NOI of $31,680. Which is way better than the $12,600 you had before. Even if you don't bring those nine pads online, you'll have an NOI of $18,720.
2. How much it will cost. We'll do an all cash scenario and an owner carry back.
All Cash: Park and Homes= $167,000
Repairs for POH: $20k ($5k for the Vacant and $15k for the other homes)
Cost to create Spaces: $70,000. I have no idea if this is accurate. If the hook up already exist great, this number will get smaller, if not it could get A LOT larger, but for modeling purposes $7,750 per pad construction cost seems fair.
Misc: $10,000 For tree trimming, road patches, new signs, website ect.
Total: $267,000 With a NOI of $31, 680 that's a 11.8% CoC
If you can get seller financing with say 20% down on the park+homes and pay for the improvements yourself you'll need $133,000 in cash, but your CoC jumps to 23% If you need to bring a bank in keep in mind, they most likely won't lend on the mobile home and you'll have to come up with an extra $40k.
3. How long will it take you. I have no idea how busy you are, if you plan to sell of the homes or rent them. This is where using CoC falls apart, since it can't really take the time value of money into account.
This was a broad overview, but using these numbers I think the deal is worth exploring. Of course if the park is on a well or septic you'll need to factor those costs in to your models for repairs.
Do you plan on managing it yourself?