Mobile Home Park in Contract but I have a Question

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Mobile Home Park in Contract but I have a Question

Seth Wells
Investor · San Antonio, TX · Member since 2017 · 5 posts · 4 votes

I have a mobile home park in contract for $395,000 but now after reading some of the forums I think I may have made a mistake with the evaluation. It has 23 spaces, 17 current homes rented (all owned by the park), 3 homes that need rehab, and 3 vacant spaces. I already own 12 residential units and kinda jumped into this deal without a ton of research on the differences between residential homes and mobile home parks.. Since then I have realized that most investors seem to only buy parks that do not own the homes and that they evaluate it based on the lot rents, not home rents... The cap rate listed was 16% and if you consider the home rents (which that rate does) the numbers make a lot of sense.. The big unknown is the repairs.. It was a distressed property and an investor purchased it two years ago, rehabbed a lot of the units and got it almost fully rented before now selling it for a profit. It currently has a gross income (including home rents) of $81,000 and the NOI is $65,000. If I only considered the lot rent portion, then the gross income goes down to $51,000 (but it is making the other $30,000) so I do not know how to think about this... If I continued owning the homes, I could get the gross rents to $110,000 by fixing and renting the 3 vacant homes, slowly increasing the rents for people who have been there a long time paying a low rent, and by filling the 3 vacant spaces. PLEASE lend some advise.. I can still get out of this deal if I need to but it seemed like such a great deal before I read that I SHOULD sell all the homes to the tenants.. In a perfect scenario, that would be 23 spaces x $250 = $69,000 gross income. That would equate to a NOI of $57,000 with no vacancy and no repairs. I am not sure what to do and need help!!

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Rodney Miller
Lender · Oklahoma City, OK · Member since 2017 · 138 posts · 130 votes
9y

Full disclosure: I don't own any parks.  I've purchased courses and studied this topic in detail, and have been evaluating parks for the last few months.  Sounds like he's high on his asking price.

First of all 20% sounds low for expenses especially for so many park owned homes. I'd take a close look at that. You should figure out your cap rate on lot rents alone. What is the ROI based on only lot rents? Then you might want to evaluate each house individually and add back in some value for those but keep it really low.

What you read is right....the value is in the lot rentals, not the old homes.  If you buy the park you might want to let those renters become owners and put them on a 3-5 year payoff based on their rent amount.  This will take you out of the nightmare of managing mobile home rentals and will keep your expenses down.  

Hope this helps

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  • Seth Wells
    OP
    Investor · San Antonio, TX · Member since 2017 · 5 posts · 4 votes
    9y

    Also, the seller has the homes valued at $250,000 which is probably a gross over estimation, but even if they are worth half of that, then I think the deal still makes sense.. I just don't want to make a mistake.

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  • Rodney Miller
    Lender · Oklahoma City, OK · Member since 2017 · 138 posts · 130 votes
    9y

    Full disclosure: I don't own any parks.  I've purchased courses and studied this topic in detail, and have been evaluating parks for the last few months.  Sounds like he's high on his asking price.

    First of all 20% sounds low for expenses especially for so many park owned homes. I'd take a close look at that. You should figure out your cap rate on lot rents alone. What is the ROI based on only lot rents? Then you might want to evaluate each house individually and add back in some value for those but keep it really low.

    What you read is right....the value is in the lot rentals, not the old homes.  If you buy the park you might want to let those renters become owners and put them on a 3-5 year payoff based on their rent amount.  This will take you out of the nightmare of managing mobile home rentals and will keep your expenses down.  

    Hope this helps

    2Reply
  • Seth Wells
    OP
    Investor · San Antonio, TX · Member since 2017 · 5 posts · 4 votes
    9y

    If I am just counting the currently rented 17 homes with the lot rent of $250, that equates to $51,000 gross income and $35,000 NOI, which is based on their numbers which is 30% expenses. With a 10% cap rate, that would make it valued at $350,000 not counting the homes. He values the homes at $250,000. If I cut that in half, and said they were worth only $125,000, that would still make the entire thing worth $475,000 if I wanted a 10% cap rate (the sales contract is for $395,000). My thought process is that I can do rent to own with the tenants and have them pay the $250 lot fee, plus $250 rent to own payment and after 5 years, they would own the units (and then only pay the lot fee) and I would have been paid $15,000 for the home. I also heard that investors also require the tenants to do their own repairs during that 5 year term as well and if they leave the park, they forfeit the home.

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  • Rodney Miller
    Lender · Oklahoma City, OK · Member since 2017 · 138 posts · 130 votes
    9y

    When It's all said and done if you can get a double digit cap rate you're doing pretty good and yes rent to own means that they make all repairs.  

    You are really buying income and the infrastructure.  Make sure you perform due diligence on sewer, gas, water, environmental studies, etc.... One bad infrastructure fail can sink the ship.  

    Good luck!

    1Reply
  • Derek RobinsonPro Member
    Real Estate Coach · Asheville, NC · Member since 2016 · 176 posts · 172 votes
    9y

    You are paying around 17k per lot, which is market value in my experience around the Carolinas (and a lot of the South).  Without looking at all the financials, I'd say you are not over paying.  As stated above, turning the park owned homes into seller financed units to the current tenants is your best bet if the homes are older.  You might could keep them for 6 months or so and evaluate your profit/loss and decide at that point if you want to continue to manage them or sell them off.  I've got several parks with a few units I own.  They were in good shape when I bought the parks and I have property management taking care of them and so far they've been profitable.  I'm keeping the option to sell them in my back pocket though ;-)

    1Reply
  • Rachel H.
    San Antonio, TX · Member since 2009 · 3k+ posts · 1k+ votes
    9y

    @Seth Wells It can work but depends on the condition of the homes and the type of clientele the park attracts. If the park is in a desirable area with the right kind of clientele your numbers can increase. Though, if you need to do work on the homes as well as the park that can decrease your return on investment. Sounds like the investor selling to you is trying to flip using inflated numbers based on the rents, not just the lots. If you don't feel comfortable with the deal, you can always go back in and renegotiate. Good luck! 

    1Reply
  • Joseph E.
    Investor · New City , NY · Member since 2017 · 49 posts · 2 votes
    9y

    https://www.biggerpockets.com/users/RodneyM23 Would you mind sharing us which MH courses are worth buying, giving you the knowledge needed and paying for itself.  

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