Hi everyone - first time poster here
I am looking at a mobile home park that had been listed through a realtor for several months with no bite. To me it looks like a cash flowing cow, but would love to hear what things I may be missing. The details are as follows...
14 park owned trailers. All older and in verifying conditions and currently renting for $7,050/mo
1 tenant owned trailer. Lot rent is $200
1 4 bedroom house on the property. Current rent is $700
Total monthly income is $7,950
Previous years expenses were
~$15,000 utilities (has city sewer and water)
~$20,000 Maintenance and upgrades
~$15,000 operating expenses
With vacancies, the previous year total income was ~$75,000
Asking price is $225,000
On the surface does this look like a good deal?
What questions do I need to be asking to ensure I am not missing something major?
Any other input is greatly appreciated!!
Thanks in advance!
At first glance, in my limited knowledge, it looks like someone is not great at running numbers. Either they're lying, hiding something, or just don't know how to run a park.
@Dominick Dahmen can you explain why you think that?
@Eben Rohling Well actually upon closer inspection, the numbers would work, but you have to be careful about the park owned homes (POHs). What is the actual lot rent underlying that? You only want to buy the trailers for no more than what they would sell for in that market. Don't make the mistake of capitalizing their income. I'd need some more details on the numbers personally. Like what exactly the owner spent on maintenance, etc.
Assuming $200/month lot rents (the tenant owned home currently pays $200 so it seems like a decent bogey to use for your TOH’s) you have the following rough valuation:
- 1. Gross Lot Rent: $200/month lot rent x 15 lots x 12 months = $36,000
- 2. Estimated Expense Ratio: 50% ($18,000). Note that I recommend a higher expense ratio than a traditional 30%-40% for MHP’s due to the small size of the park and the fact that the park pays for utilities as opposed to the tenants.
- 3. Estimated NOI From Lot Rent: $18,000
You can capitalize NOI from Lot Rent and add the additional items (1-shell value of park owned homes and 2-discounted value of single family home) to arrive at a rough valuation:
+ shell value of older park owned homes = $500 to $1,000 x 14 homes = $7,000 to $14,000
+ market value of single family home = ?? (Apply a 30% Discount to a comparable home in the area due to the fact that the home is located in a MHP and typically cannot be sold for true market value because of the negative stigma associated with its presence in a MHP.)
With the above in mind, and the value of the single family home omitted from this analysis, the estimated valuation range seems to be:
@10% Cap Rate: ($18,000/10%) = $180,000 + Shell value of 14 POH‘s ($7,000 to $14,000) = $187,000 to $194,000
@9% Cap Rate: ($18,000/9%) = $200,000 + Shell value of 14 POH‘s ($7,000 to $14,000) = $207,000 - $214,00
To finalize this estimate, you need to:
- a) determine the appropriate market cap rate to use when capitalizing the NOI. The examples above (10% and 9%) were used at random because it made the math easy. Talk to other MHP brokers to determine the cap rate at which other parks are trading in your area. For guidance, parks in larger metros (100k+ population) and in decent condition trade at lower cap rates whereas parks in small metros (<50k population) trade at higher cap rates. Small changes in cap rates drive major swings in estimated value so be conservative and skew towards using higher cap rates in your estimates.
- b) determine the appropriate value of the single family home in the park
I hope the analysis above sheds light on the factors to consider in the valuation estimate.
@John Jacobus that was very detailed and helpful! Thank you!
I haven’t seen inside the house, but I wouldn’t put more than a $40,000 value on it personally. If I understand correctly, using a 10% cap rate and $1,000 per MH, and $40,000 for the house puts the total value at $227,000. So the asking price seems to be inline with a back of the napkin calculation
@Eben Rohling I agree with your thinking
@John Jacobus nailed it. Also, please please understand that anytime you are buying a park with homes included (park owned homes) you will almost ALWAYS spend more money on repairs and maintenance than you anticipate. People will move out and you will have to fix up a home that you thought was in better condition than when you initially purchased it. People don't estimate correctly how much work most park owned homes will need until it's after the fact.