I want to get started in mobile home park ownership. I have read several books on mobile home park investments. I wanted to ask someone that's been in the mobile home park business some questions. I would like to know if you are able answer some questions for me.
What are the common motivations for MHP owners to sell their park? Why do they?
I am also trying to better understand how to assess the numbers in a deal to determine if it is good or bad?
In addition, I have learned that searching for deals outside of my current area is a great idea. What are some key data points that will help determine a good out of town market?
Thank you for your reply,
Highly recommend this, if you haven't already gone through it:
I am also very interested in this topic. Looking forward to the responses your question will receive.
Best of luck on your mobile home park investing journey!
I worked with a private equity group buying mobile home parks and oversaw purchase of about $30m in assets across the midwest and southeast.
To get a better sense of where the gaps in your knowledge are, let's say that a mobile home park had 100 Lots and was 100% full.
Each resident owned their own home and was paying $300 / mo in lot rents.
Based on reviewing the seller's books, you determined that about 30% of revenue would be going toward expenses.
Let's assume 100% collections and 100% occupancy going forward. There's no cap ex needed and no closing costs.
After talking to brokers, you found out that typically mobile home parks in that area are valued at 10% Cap Rate.
- What's the market value of the property?
- What would your cash on cash return be for Year 1 of ownership?
If you can answer that question, then the next step would be to add in a few factors:
- What happens if half the residents are renters and paying an additional $300 in MH rent each month, on top of lot rents?
- How do you calculate an IRR, assuming a you sell in 5 years at 10% Exit Cap Rate with 5% Year over Year increases in lot rents?
In general, underwriting mobile home parks is similar to underwriting any asset.
The biggest difference would be in how to treat the MH income streams, as appraisers and banks don't give them the same value as they do for the income generated through lot rents (and neither would sellers).
I also have a YouTube Channel where I post about the industry. A lot of the content I've posted is geared more toward general news and insights but starting next week I'll be posting more info on how to underwrite mobile home parks, the difference in how MH income streams and lot rent income streams are valued, finding deals, etc. Hit subscribe if you'd like to stay up to date.
Ps. There are many 'shortcuts' to valuation - ie. multiplying number of occupied lots x lot rents x a value multiplier (60-100). Those methods work but all valuations in investment still boil down to one basic principle: How much should we pay today for future cashflows? Calculating that requires use of some basic finance metrics (such as IRR or discounted cashflows) to compare apples to apples.
Hope this helps!
Charles Andrews...Thank you for the info, will definitely buy the book.
Daniel Ryu, thank you...that totally made sense. will be checking you out on youtube. Do I just type your name to find your channel?
@Daniel Ryu Thank you for that I figured the cash on cash return would be 10% if you invested 2,520,000.
I wasn't familiar with the IRR formula but found a comprehensible explanation of how it's used and why it's useful. https://www.investopedia.com/terms/i/irr.asp
Thanks for the guidance. You also just gained a new subscriber.
Thank you so much! I appreciate it.
You are correct, if there's no change in NOI for Year 1. (NOI = net operating income aka profit)
You'll notice in your calculations that there was a "trick." If you only look at purchase price and exclude any other expenses (cap ex, closing, etc) and you're not increasing revenue or NOI in Year 1, then your cap rate and Cash on Cash will be the same.
The cash on cash fluctuates from the cap rate in Year 1 due to added expenditures on top of purchase price (Cap ex, closing costs, etc) and changes in NOI for Year 1. Without those, the math calculation is the same.
Take a look at the attached jpg:
The IRR is a simple formula in Excel.
Start with a negative number (negative cash outflows)
Then combine all the cashflows that come in.
Apply the IRR formula.
Now that you have the IRR you can start to assess lots of things:
1) How does this compare to other investments?
2) Does the pricing seem right?
3) Will this satisfy investors?
When you're doing this for real, of course, you'll have to add in many other factors:
* Cap Ex, Due Diligence, Closing Costs, etc
* Financing if any is available
* This gives you the projected deal-level IRR - which is great if all the capital is yours or if everyone involved is getting a proportionate share of the deal based on their investment. But if you're working with silent partners in a syndication, then the cashflows will be further divided between what you get for your work and what the investors get.
It took me a while to grasp the IRR calculation.
If you want to dive a little deeper check out:
"Time Value of Money"
And the book that helped me understand the basics of real estate investing finance: What every real estate investor should know about cashflow and 36 other key financial measures
Let me know if it helps!
Read Manufactured Insecurity by Esther Sullivan before you consider investing in this predatory business scheme.
We are looking at one as well. Old Rv park, month to month renters, underutilized, inexpensive. Also has a duplex and a single family home all sandwiched between a RR and a highway. It's a smallish farm and ranch town. A new manufacturing plant is coming in. Still deciding. the Cap would be 10% without any changes, with potential for a lot more. It is mostly empty as the previous investor did not have time for it and used it as a write off. I've spoken to tenants, called the railroad, chamber of commerce etc to assess the need and growth potential. Still debating. I'd love to hear what you find out.
Sounds like your doing a good job with due diligence, trying to establish the most important factor - future demand in the area.
I’m not as familiar with RV parks but typically they will be valued at a lower price (higher cap rate) than a MHP.
Banks will also view them differently because the tenant base can always “drive away” while a MH is very difficult to move.
I looked at the portfolio of RV parks for Sun / ELS - two of the biggest RV owners in the country. The transient RV business (short term stays) was hit hard by COVID 19 while the MHP side of their business has chugged along with little shock (so far).
Of course there are also some positive signs:
* RV rentals are showing a strong rebound as people are scared of traveling by plane or stay in hotels.
* Workforce RV housing can have an excellent return if there’s demand as there’s less capital needed to fill up the park.
But bottom line, RV parks are treated differently than MHPs by investors / banks. (If you have annual contracts however that helps out)
All real estate is local - good luck with your investment.
Also I have a Youtube channel that covers trends in the MHP industry as well as a soon to launch How To Invest in MHPs Series if you’re interested. Link in my bio.
We always look for poorly managed or under performing parks that fit our model. For example:
1. has good value add such as under market rents... 2. in a good area or area we can control somehow to improve the tenant class 3. has infrastructure that works within a calculated set budget 4. has limited physical things that can go wrong, such as maintenance, trees, water/sewer pipes, well, septic 5. owners don't know how to fix the problems in the park 6. management are just winging it and don't have a good plan in place
Getting started my best advice is to analyze enough deals to where you can spot a deal within a few minutes of getting the financials and looking at the park on maps. Until then it is very high risk.
Actually what we have seen in Akron NY has been just the opposite of "improving the tenant class". By raising the rent to "market value" little is left in people's budget for maintenance of homes - forget home improvements. As the homes decay, so does the value of the homes and the attractiveness to an "improved class" - whatever that means. There has been close to zero improvement in the infrastructure here since we were purchased by Sunrise Capital Investors. The roads need work and the preventative maintenance activities that used to be done by the previous owners are absent. We already watched a park in our community fall into decay after new owners purchased and mucked up the community. Now, the tenants there can't even give their homes away. There is simmering resentment here for the owners. Beware, tenants all over the country are organizing to rid their parks of investor owners.