Valuing a Mobile Home Park purchase based solely on Rental Income
Rental Property Investor · Pensacola, FL · Member since 2009 · 85 posts · 38 votes
I need some input from all you BP MHP Pros!
I met with a seller yesterday who has an 81 unit all POH Park for sale based on a 7x multiplier of his annual rental income. Would anyone here buy an all POH MHP based solely on a rental income multiplier? In my mind POH parks are worth the value of the land + the value of the homes + some consideration for the amount of income they produce. But I know businesses are often sold on a 5-8x multiplier of gross sales, which basically is what rental income is to MHP. If all valuation factors are in the normal range (ie. Expenses 30%, Rent rates at market value,...etc.) is a 7x income multiplier reasonable for a MHP?
I need some input from all you BP MHP Pros!
I met with a seller yesterday who has an 81 unit all POH Park for sale based on a 7x multiplier of his annual rental income. Would anyone here buy an all POH MHP based solely on a rental income multiplier? In my mind POH parks are worth the value of the land + the value of the homes + some consideration for the amount of income they produce. But I know businesses are often sold on a 5-8x multiplier of gross sales, which basically is what rental income is to MHP. If all valuation factors are in the normal range (ie. Expenses 30%, Rent rates at market value,...etc.) is a 7x income multiplier reasonable for a MHP?
We already value commercial RE on a multiple of earnings, just a bit differently. Bear with me for a second, this got long.
In stocks/businesses , the most common multiple valuation technique is Price/Earnings. There are lots of others too: Prices/Sales, Price/Book Value, Price/Free Cash Flow.
Price/Earnings= [Price per share/Earnings Per Share(EPS)] Since EPS is (Net Income/ Total Common Shares) and Price per share is (Market Value/Total Common Shares) the PE=
(Market Value/Total Common Shares)/(Net income/Total Common Shares).
Both Price per share and EPS divide by the total shares, those cancel leaving:
PE=Market Value/Net Income. Note, this is Net Income, which is similar to NOI. It is NOT Revenue
Now if I know the Net Income (NI) and the PE ratio I can get the value?
Not always. This method only holds true for companies in the same industry. For lots of reasons, it can be normal for companies in different industries to have different NIs, but have the same revenue; OpEx, deprecation schedules, CapEx...Also, as with any calculation, its highly dependent on the actual source of the numbers. Are you using pro forma projections or audited historical performance? Garbage In, Garbage Out as they say. So in Industry A, a multiple of 14x is normal, but in Industry B 20x is within reason.
Almost like how apartments sell for a 5 cap, but MHPs sell for 7 Cap. Because a 5 Cap and 20x earnings are the same thing mathematically. (x/.05=20x)
Rephrasing your question now that we know all of this: Would we buy an 81 space park with all POHs for a 14.3 Cap based off GOI and not NOI?
F*** No!!
You'll over pay by a factor of the Expense Ratio, which in a park like this is north of 60%. In other words, paying $2.50 for a $1 bill.
To talk with the seller, run the numbers for you to operate the park. GSR-GOI-NOI. Put an acceptable Cap Rate on the NOI based off the market, condition of the homes, condition of the park, utility set up.. to get a value. Then do a Price/Sales ratio and see how far you two are off. I bet you'll get a Price/Sales of 3-5.
generally I wouldn’t buy an ALL POH MHP. That’s basically buying an apartment. This is just my opinion though.
I need some input from all you BP MHP Pros!
I met with a seller yesterday who has an 81 unit all POH Park for sale based on a 7x multiplier of his annual rental income. Would anyone here buy an all POH MHP based solely on a rental income multiplier? In my mind POH parks are worth the value of the land + the value of the homes + some consideration for the amount of income they produce. But I know businesses are often sold on a 5-8x multiplier of gross sales, which basically is what rental income is to MHP. If all valuation factors are in the normal range (ie. Expenses 30%, Rent rates at market value,...etc.) is a 7x income multiplier reasonable for a MHP?
We already value commercial RE on a multiple of earnings, just a bit differently. Bear with me for a second, this got long.
In stocks/businesses , the most common multiple valuation technique is Price/Earnings. There are lots of others too: Prices/Sales, Price/Book Value, Price/Free Cash Flow.
Price/Earnings= [Price per share/Earnings Per Share(EPS)] Since EPS is (Net Income/ Total Common Shares) and Price per share is (Market Value/Total Common Shares) the PE=
(Market Value/Total Common Shares)/(Net income/Total Common Shares).
Both Price per share and EPS divide by the total shares, those cancel leaving:
PE=Market Value/Net Income. Note, this is Net Income, which is similar to NOI. It is NOT Revenue
Now if I know the Net Income (NI) and the PE ratio I can get the value?
Not always. This method only holds true for companies in the same industry. For lots of reasons, it can be normal for companies in different industries to have different NIs, but have the same revenue; OpEx, deprecation schedules, CapEx...Also, as with any calculation, its highly dependent on the actual source of the numbers. Are you using pro forma projections or audited historical performance? Garbage In, Garbage Out as they say. So in Industry A, a multiple of 14x is normal, but in Industry B 20x is within reason.
Almost like how apartments sell for a 5 cap, but MHPs sell for 7 Cap. Because a 5 Cap and 20x earnings are the same thing mathematically. (x/.05=20x)
Rephrasing your question now that we know all of this: Would we buy an 81 space park with all POHs for a 14.3 Cap based off GOI and not NOI?
F*** No!!
You'll over pay by a factor of the Expense Ratio, which in a park like this is north of 60%. In other words, paying $2.50 for a $1 bill.
To talk with the seller, run the numbers for you to operate the park. GSR-GOI-NOI. Put an acceptable Cap Rate on the NOI based off the market, condition of the homes, condition of the park, utility set up.. to get a value. Then do a Price/Sales ratio and see how far you two are off. I bet you'll get a Price/Sales of 3-5.
I personally would not invest in a park full of POHs. Expenses on the homes will end up making the home portion of the rent a wash leaving only the lot rent as income. Lot rent portion will have expenses in the range of 30% in a well run park. Additionally managing that number of homes with a tenant base that is likely below average quality will be a night mare.
Tenant quality is a major factor and mobile renters will be closer to D class than C in most cases. If it is a upscale high quality community you may have less issue but if not someone will be working full time with a cattle prod keeping them on track.
I bet you'll get a Price/Sales of 3-5.
@Bill F That is an incredible reply. Really appreciate your thought process. The 3 - 5 multiplier is exactly what I had in mind. But now I have some reasoning behind it. Would like to reach out to you directly to discuss this one in more detail.
Hi Reid,
The other scenario to look at would be from the standpoint of converting all POH to residence-owned. Under this scenario, you would establish the monthly lot rent first x multiplier (I think it was 80 if residences paid own utilities, and 70 if the owner pays utilities). Then you would assign/establish the value of the units themselves + any other valuable improvements on site.
I just heard about this valuation from the Mobile Home Park Investors podcast by @Jefferson Lilly and Brad Johnson. Light bulbs started turning on for me.
Cheers,
The industry is heading towards more POH's. In certain markets selling off POH's is easy to do and can be done relatively quickly with some decent focus from either a good sales manager or someone with those skills that you higher.
Valuing a park w/ all POH's can be tricky and @Bill F. stated valuing it can be tricky and its like running an apartment.
Dependent upon on what market lot rent is, you could reset everyone whom converts to that market lot rent and the valuation on what they have given for a price may still workout. All hypothetical scenarios don't always transition to real life situations.
Florida overall, depending on markets, your normally going to pay a more premium on price because of the location...
@Ryan Groene What makes you see POHs as more of the normal going forward?
The industry is heading towards more POH's.
@Ryan Groene, you may be right. I'm too new to know if this is a trend the industry is moving towards, but I can say that in the NW Florida market, the majority of parks are operated as POH parks. I haven't tried to convert tenants to home owners yet, but my feeling is it won't be widely successful.
Hi Reid,
The other scenario to look at would be from the standpoint of converting all POH to residence-owned. Under this scenario, you would establish the monthly lot rent first x multiplier (I think it was 80 if residences paid own utilities, and 70 if the owner pays utilities). Then you would assign/establish the value of the units themselves + any other valuable improvements on site.
Thanks Aaron. I'd be a lucky man if we could get this park for this valuation, which would put it more in a 3-4x multiplier on revenue. Which I think is reasonable. I definitely need to listen into more of the Park Street Partner webinars.