MHP - Off Market Deal - Need help analyzing.

[Jamin Olds]

Hey Everyone- 

I am currently in discussion with the owner of a 30 unit mobile home park and need some advice input.  I have studied MHP investing and this would be my first deal. I currently have 26 residential rental units. 

Here is the breakdown of the offer presented to me by the seller: 

Purchase Price: $400,000

30 unit park - 28 lots currently rented. 

Lot rent: $300

All trailers owned by residents. 

Monthly Income: $8,400. 

Total monthly expenses: $3,966.  This includes sewer, water, taxes, electric, and 30 year note. 

MONTHLY CASH FLOW: $4,434

This seems like a fairly good deal! I also know I can get it lower price than $400,000.  Am I missing something? Would you purchase this park? There are 4 parks in this town and this park is by far the best maintained etc.  Any advice, input, etc would be greatly appreciated. 

Thanks!

[Frank Rolfe]

This park would roughly produce the following net income:

28 x $300 x 12 x .6 = $60,480. At a $400,000 price, that's a cap rate of about 15%. So the price is great.

However, is this city water and sewer? And is the power or gas master-metered? That's not clear from your description and could have a huge impact on the cap rate.

Also, how big is the metro market, what's the median home price, and the average 3-bedroom apartment rent?

You'll also need to run a test ad.

I would go ahead and tie it up at that price, based on just that one item, and then do some preliminary diligence on the other issues. But sounds good so far.

[Patrick McKenna]

Additional expenses I would consider are management fee (either paying someone to do it or allocating an amount for yourself to do it, lawn care / snow plowing, road maintenance (assuming it’s in Michigan the roads probabaly need work after each winter), marketing (to fill the remaining spots), annual permit fee (probabaly small) 

Is the water / sewer one master meter? Submetered? Able to bill back to the tenants? Are the pipes in good shape? No leaks? Winters are tough on old pipes  

All 28 tenants pay on time every month? 

What are lot rents at the other parks in town? 

Is the seller providing financing? 

[Adam Johnson]

You don't mention management expense. Who manages it now? Who will manage it if you buy it? That number of units isn't full time management in most cases, but will require some "handling" of situations. Even if you plan to manage yourself, plug in an allowance for what it would cost to hire a replacement in case you can't or don't want to anymore. This will effect the NOI which, in turn, will effect your potential offer price. Frank's back of napkin analysis would generally include that expense. HOWEVER, nothing beats a specific analysis. Know about utility costs as well. I know of a park not far from mine that got KILLED with water assessment charges per lot when public water was run by their park. It blew their property taxes up and was a fairly unique expense for that location in particular.

[Adam Johnson]

Also, for cash flow planning purposes, a 30 year note isn't likely unless it is seller financing and they are willing to go that long.

[Jamin Olds]

@Frank Rolfe

The water is actually two separate wells ($360 per month in water testing etc) and the septic is city- about $1200 a month.

Good question on he power or dad meter. I am not sure and will find out.

The area is rural and very low income. I grew up in the town and actually teach at the high school. We own one 3 bedroom house in town and rent it for $700. To say it nicely, it is a very poor town.

I believe I can negotiate the purchase price down to $375,000. I know the sellers and they tipped their hand on what debts they have etc.

Thanks you for your input. My next step is to figure out financing as they stated they can’t do a land contract. We are thinking about selling a few of our duplexes because we have great equity in them and then 1031 into this deal.

[Frank Rolfe]

Go to www.bestplaces.net and look at the city, county and metro population and report back, as well as the median home price and 3-bedroom average apartment rent. Also look at the vacant housing rate. Post the results and I'll give you my opinion.

[Jamin Olds]

@Patrick McKenna

It is in Michigan. We plan on self managing as we currently self manage our 20+ residential units. Our current mower/plow guy lives in the same town as the park.

Good questions on the submetered for water and if we can bill back to tenants. I honestly have no idea and will find out.

Current owner say most pay on time but normally 1-2 are late. Not sure how accurate this is. I asked about seller financing. The current owner bought it from their mom on land contract. Basically the mother couldn’t handle it anymore due to getting older and the daughter bought it from her to help her out. I don’t think the daughter really wants to own the property. I’m trying to think of a creative way for seller financing that I could present to them as I would prefer seller financing over a bank.

Thanks for the input. You provided me with some great info and answers I need to get from the seller.

[Jamin Olds]

@Frank Rolfe

Will do - after I get my kids down for bed tonight.

Thanks Frank.

[Jamin Olds]

@Adam Johnson

We will manage it ourselves but I like your idea to include an allowance even though we are self managing. I’ll dig into the utility cost more. Next week the owner is going to meet me at the park to provide financials and give me a detailed tour of the park.

Thanks for you advice. Very helpful.

[Jamin Olds]

@Frank Rolfe

Population 6,916

Unemployment 5.1%

Median Income $39,297

Average home price $77,300

Would love to hear your feedback.

[Frank Rolfe]

Need more info. Go back to Bestplaces and click on the metro population under the big box and, if there's none, then the county population right beside it. Also need the vacant housing rate and 3-bedroom apartment rent that is found on the "Housing Stats" tab.

[Taylor Chiu]

@Jamin Olds

Wow sounds like this could be a great deal. Depending on how the test ads do and how reliable those wells are. Trust @Frank Rolfe, he’s the best in the biz!

[Jamin Olds]

@Taylor Chiu

Thanks Taylor. Can you inform me on exactly what the test ads are?

[Jamin Olds]

@Frank Rolfe

The location is Hartford Mi. I’ll get the addition information you need.

[Frank Rolfe]

You are in the Kalamazoo metro with a population of 335,000, so the market population is fine (we prefer 100,000 and up on the metro). The vacant housing rate is 14.18% vs. the U.S. average of 12.24% -- which is fine. 3 bedroom apartment rent is $1,051 per month.

Essentially, the park is in a small town inside a large metro, and what makes it good or bad is the desirability among locals to live in that town. You will learn that with the test ad.

The bottom line is that you should go ahead and tie it up and start doing due diligence on it.

[Jamin Olds]

@Frank Rolf

Thanks Frank. I will get it under contract this week and go from there. Due to me know the owner, they will give me some time to figure out exactly how to buy it.

[Taylor Chiu]

@Jamin Olds

The test I had would be an ad generally on craigslist that is advertising for someone to rent a lot or mobile home. You wouldn’t mention specifically what park, but just that you had one available in that area. I can’t exactly remember what Frank’s standard is, but ideally you should be seeing about 10 inquiries within a few days. If you are, that’s a good sign there is plenty of demand

[Jamin Olds]

@Taylor Chiu

Great. I will do that. Thanks for the help!

[Frank Rolfe]

You need to put the test ad on Craiglist and the largest metro newspaper (in this case Kalamazoo) in the "mobile homes for rent" section of the classifieds in the paper, with the name of the city in all-caps, the monthly home rental amount (take your lot rent and add $400) and a Google disposable number that tracks all calls in. After 10 days remove the duplicates and see how many unique calls you had. A good test ad will score 20 to 40 calls over 10 days.

But put the park under contract before you do the ad.

[Chris C.]

@Frank Rolfe where do you get the .6 from?

[Frank Rolfe]

The standard expense ratio in the industry is 30% if the tenants pay their own water and sewer and 40% if the park pays it. Since this deal is private water and sewer, the park is effectively paying for it, so the expense ratio is estimated to be 40%, thus .6 reflects the net income (60% of gross). Of course, that's subject to thorough due diligence and double-checking each cost line item. Those percentages are strictly guidelines and not rigid.

[Jamin Olds]

@Frank Rolfe

Great information. I’ll will get it under contract the run my test ad. Thanks again.