New investor with questions on a deal. Am I missing something?

Mobile Home Park Investing
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New investor with questions on a deal. Am I missing something?

Jason Vaughn
Investor · Tacoma, WA · Member since 2016 · 34 posts · 3 votes

Sorry from all Caps but #'s from seller. 

INCOME

UNITS YEARLY RENTS 15 units @ 7185 mo 86,220

VACANCY 5% = 4311

TAXES 2135

MANAGER 2400

INSURANCE 1267

WATER/SEWER

GAS/ELECTRIC 2818

GARBAGE 3694

MAINTENANCE/REPAIRS 1057

TOTAL EXPENSES 13,371 +VACANCY 4311 = 17682

NET INCOME 68,538 

Asking $595,000 as listed based on sellers #'s it is a 11.51% Cap Rate expenses seem a low though

Few things of note.

1. Management is only $200 a month. Per agent there is an onsite resident manger/maintenance. Still seems a little low though

2. No water/ Sewer because it is on well and septic. Is there a amount that could be billed to tenants for well/ septic repair/ maintenance? or just account for as part of rent as cap ex?

3. Electric is paid by all but 2 units. Not sure why not all units pay electric  

4. No CAP Expense listed. With septic how much should I account for? 5-10%?

5. All Home are tenant owned and that is where things get interesting. The homes are all on seller finance contracts with a total of 100,281 for 7 yrs @ 8%  =1531 mo or 18,372 yr until paid off. These contracts are included in the sell.

6. Seller is willing to do a small 2nd mortgage as seller finance.

7. Rents seem to be pretty close to market average so not much room to increase income. Maybe able to get last 2 units paying there own electric and maybe individually bill garbage but not sure.  

I am interested in the deal but thinking a little over priced based on low expenses. My thought is calculate based of 40% expense for cap ex and other unforeseen/ undisclosed expenses. They had it listed as a 10% cap but not sure how they came with that #, with increased expenses at a 10% Cap I am coming up with 505k. Although most I see in this area are offered around 7-8% and this would be 9%

Also How would I account for the amount for the contracts? Price the park then add the mount for contracts? I have heard most note buyers buy at a discount. Not sure if same would apply here. Would any note buyers want to just buy the batch as a whole if I were to purchase this deal? 

I would need seller financing to make this happen so note sure if it would be best to negotiate off the selling price, negotiate off the notes, or focus on best seller finance terms.

Thanks Jason

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Rachel H.
San Antonio, TX · Member since 2009 · 3k+ posts · 1k+ votes
8y

@Jason Vaughn Yes, maintenance/repairs looks kind of low. Usually, the most costly is plumbing. Also, where's the landscaping expense? That's another costly item when it comes to managing mobile home parks. 

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  • John Acheson
    Renter · Las Vegas, NV · Member since 2018 · 278 posts · 71 votes
    8y

    Is the CAP average for the area? If so, it's too high and probably the neighborhood and/or tenants might be challenging or the numbers aren't coming from the tax returns. What kind of tenants?

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  • Gulliver R.
    Rental Property Investor · Seattle, WA · Member since 2016 · 524 posts · 148 votes
    8y

    Key questions you always wanna ask yourself:

    Is there upside in filling vacancies? 

    Is there upside in raising rents? 

    Is there upside in getting rid of any unnecessary expenses? 

    Is the current owner and manager doing a crappy job in running the park (can you as the new owner do better?)?

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  • Jason Vaughn
    OP
    Investor · Tacoma, WA · Member since 2016 · 34 posts · 3 votes
    8y
    From what I have seen Cap is more like 7-8% but would need to contact agent for a more accurate #. The park is in a smaller town of about 20k people and 12.8% growth since 2000. Not sure on residents have not been on site yet but pics look decent open park like setting.
    0Reply
  • Jason Vaughn
    OP
    Investor · Tacoma, WA · Member since 2016 · 34 posts · 3 votes
    8y
    @Gulliver R. I don't believe there are any vacancies Looking at rent roll 2 spaces are 600, then the other half are 500 and 400. If I could get all up to 600 it would be about 40k more in income. I also realized bit was listed as 15 units but there are 18 rents so would need to double check why. Maybe cut expenses but they already seem low. What % expenses are your parks at? Not sure on poor management yet but maybe. Also of note it is on 10 acres of land. First glance no more allowable units based on zoning but more research needed. Thanks Jason
    0Reply
  • Gulliver R.
    Rental Property Investor · Seattle, WA · Member since 2016 · 524 posts · 148 votes
    8y

    I would call all the neighboring MHPs and ask how much their lot rents are and how much their home rents are. Then you can find out if you can raise rents to market. If you’re paying that much money you need to see more upside to make it worth it. 

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  • Nathan DionesPro Member
    Real Estate Broker · Redlands, CA · Member since 2011 · 127 posts · 43 votes
    8y

    I would definitely under right at least 35% to 40%  give or take  for your own purposes .  Anyting over that may be a bonus to you

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  • Rachel H.
    San Antonio, TX · Member since 2009 · 3k+ posts · 1k+ votes
    8y

    @Jason Vaughn Yes, maintenance/repairs looks kind of low. Usually, the most costly is plumbing. Also, where's the landscaping expense? That's another costly item when it comes to managing mobile home parks. 

    1Reply
  • Jason Vaughn
    OP
    Investor · Tacoma, WA · Member since 2016 · 34 posts · 3 votes
    8y
    Thanks @Gulliver R. and @Nathan Diones I can call around and check on comparable rents. I will also figure higher expenses for Cap ex and valuation purposes. So if I figured 40% that would give a net income of about 51,600. Based on that what Cap Rate do you normally look to buy at? What cap if say it's a stabilized park? What if there is still room to increase rent myself?
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  • Jason Vaughn
    OP
    Investor · Tacoma, WA · Member since 2016 · 34 posts · 3 votes
    8y
    Also how do I account for the 100k in seller financed contracts on the tenant owned homes?
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  • Jason Vaughn
    OP
    Investor · Tacoma, WA · Member since 2016 · 34 posts · 3 votes
    8y
    @Rachel H. Yeah repairs and maintenance is low but with them being all tenant owned and no office on site that kinda made since to me. May I am wrong though I have never purchased park before. I was actually thinking it was for landscaping and doesn't look like they do anything fancy other then mow. I realized the plumbing was missing to and since septic and we'll thinking including that with capx but not sure.
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  • Gulliver R.
    Rental Property Investor · Seattle, WA · Member since 2016 · 524 posts · 148 votes
    8y

    @Jason Vaughn I don't usually care much about buying a park at a certain cap rate. I will buy if there is upside in filling vacancies, rent increases, lowering expenses, Etc AKA what can I do to improve the NOI? And if I'm buying it at that price am I getting a pretty good cash on cash return as is? If yes, then it could only get better from there when you make your improvements. I would do test ads to check how well you can fill vacancies too.

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  • Victor S.
    WorldWide · Member since 2016 · 1k+ posts · 1k+ votes
    8y

    "All Home are tenant owned and that is where things get interesting. The homes are all on seller finance contracts with a total of 100,281 for 7 yrs @ 8% =1531 mo or 18,372 yr until paid off. These contracts are included in the sell."

    Can you decipher this a bit more? is 100,281 remaining balance or what? You say "all" homes are tenant owned, but this balance doesn't make sense then. How does this affect your capex if they are all tenant-owned? Did you see the contracts and what is/isn't covered?

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  • Bill F.
    Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
    8y

    @Jason Vaughn First off his numbers don't add up. I get Expenses of $10,971, but that will come out in the wash when you get bank statements. 

     You have two separate transactions:

    1. Buying a Mobile Home Park

    2. Buying 15 Notes secured by Mobile Homes

    The Park: Before you can figure out what you could do with the park you need to figure out where it stands now. I agree @Rachel H. that the expenses ratio for a park with well and septic sitting at 13% scream deferred maintenance. You'll need to get both inspected to see what maintenance is required and the remaining useful life for both. Then divide replacement cost by useful life and you'll get a better idea of your required CapEx going forward. To make a conservative assumption, I'd plug in 50-60% expense ration due to the deferred maintenance and the small size of the park. Based on a 50-60% expense ratio and a 11-13 Cap I'd say the park is worth around $260K-$380K. 

    The Notes: I'm not at a note investor and my bond valuation skills are rusty at best, but I think you're spot on that you shouldn't pay face value since  rising interest rates have eaten into the risk premium. Do the notes have seven years remaining or were they a seven year term? 

    Assuming seven years remaining and you want some margin of safety against rising rates and the fact that you don't know a lot about the credit worthiness of the borrowers (though you should see their files as part of DD) I'd have a required return of at least 14% so that makes the notes worth about $73.5K

    Another option is not buying the notes at all since you don't know if they are SAFE act compliant and you can avoid the hassle/risk.

    Total price: $330k-$450k, but you'll put finer point on that once you get into DD. You'll also figure out how much capital you'll need to operate the park for the first few years in addition to your down payment, which will get you to your overall return once you figure out if you can increase revenue and/or decrease expenses. 

    Hope this helps.

    1Reply
  • Jason Vaughn
    OP
    Investor · Tacoma, WA · Member since 2016 · 34 posts · 3 votes
    8y

    @Victor S. Sorry I miss typed, they are all tenant owned but only 10 are on contracts. The balances range from 5000-12000 with payments from $80-$210. They are 7yr loans at 8% but not sure how far into the contracts they each are. I have not seen the contracts but none of this is include in the #'s above or the Cap Rate as listed above 

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  • Jason Vaughn
    OP
    Investor · Tacoma, WA · Member since 2016 · 34 posts · 3 votes
    8y

    @Bill F. I recheck and it looks like they are correct, it looks like you may have missed the $2400 management but that seems super low anyways. Yeah I was also thinking looking at them separate and then adding it back together. 

    The Park: I have never dealt with septic tanks or wells but looking quickly I am not seeing there is much maintenance other than pumping them every 1-3 years which cost $100-300. Other than that If all the homes are tenant owned and there are not any other park owned buildings,other then landscaping and Cap EX what other yearly maintenance would you expect? I would want to have septic systems inspect first of course though and as you said that will help determine Cap EX. Unless systems need major work or replacement I was thinking more like 40%. 

    The Notes: Yeah I was thinking about a 30% discount as long as they were all current. Do you know any note buyers? The seller at this point wants the notes to go with but I was thinking turning around and selling them right away to a chunk of money back and increase IRR but not sure how feasible it is though.

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  • John Acheson
    Renter · Las Vegas, NV · Member since 2018 · 278 posts · 71 votes
    8y

    Why not pull the ACTUAL tax returns and run your own CAP calculations to come up with an offer number that would work if you feel good about the area, property, tenants, etc.

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  • Jason Vaughn
    OP
    Investor · Tacoma, WA · Member since 2016 · 34 posts · 3 votes
    8y

    @John Acheson Definitely plan to get both tax returns and bank statements to verify information and come up with a better CAP rate but at this point going on the limited data from the owner. I will be requesting more info when and if I decide to put an offer in. At this point deciding if it is even worth it

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  • Ola Dantis
    Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
    8y

    @Jason Vaughn Hey Jason, 

    One thing to make sure you double check is that the primary lender is ok with the Seller Financing arrangement. 

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  • Bill F.
    Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
    8y

    @Jason Vaughn my bad on the numbers, you are correct, I had copied a tab in my spreadsheet and didn't remove a hard-coded cell lol. 

    Repairs/Capex: CapEx isn't included in an NOI calculation since its not part of "normal" operating expenses, so we can ignore that for now.

    The reason that I suggest a high number for repairs is twofold: 

    1. since this is such a small park any medium sized repair can blow your budget sky high. If tree gets hit by lighting and needs to be professionally removed... boom $5k. I don't if the park has gravel or asphalt roads, but either way fixing those can get expense and being in the PNW makes those repairs more likely than say New Mexico since you get far more rain. 

    2. you'll get more fidelity on this once you see five years of tax record, but if the owner has run this park at a 13% expense ratio, other surprises will pop up. That's just the nature of dealing with non professional owners.

     At this point the difference between a 40% and 60% expense ratio doesn't matter that much. You've decided that you want to move forward so you'll need to get answers to all the assumptions to figure out what expense ration you'd run the park at. 

    Notes: Sorry man, not my space so I can't help you. Curious how did you come up with the 30% discount?  

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  • Jason Vaughn
    OP
    Investor · Tacoma, WA · Member since 2016 · 34 posts · 3 votes
    8y
    @Ola Dantis thanks for heads up and yeah Definitely will if it gets to that point. My thought is he is only doing small amount seller finance so we can pay off his mortgage and he just seller finance the rest but haven't gotten that far yet.
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  • Jason Vaughn
    OP
    Investor · Tacoma, WA · Member since 2016 · 34 posts · 3 votes
    8y
    @Bill S. That makes a lot of sense about the cap rate and expenses. As far as notes honestly it's something I just heard I believe from the BP podcast. The guest was talking about how he purchases them and even the good ones he buys at discount the bad ones he buys for pennies on the dollar.
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  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    8y

    @Jason Vaughn I think you meant to mention @Bill F. 

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