This is my first post so please bear with me and be patient if I don't follow standard decorum. I'm just going lay some out of the details and I would really appreciate some insight as if it seems like a deal some of you experienced investors would consider.
There are 20 mobile home units, all of which are included in the purchase price and then the tenants each pay rent. The mobile homes vary in size but rent ranges between $400 and $750 per month per unit. Total monthly rents come to $11,855. 4 of the units are HUD qualified (if you have insight to benefits/drawbacks of this, I'd love to hear it). It's on just shy of 3 acres of land. There is a duplex on sight that the manager lives in. All tenants and the manager would be inherited. Water is master metered and paid by the owner but all other utilities (sewer, gas, cable, electricity) are individually metered and paid by the tenants It is in a small, rural town in Washington state. Probably a C+ neighborhood.
Here is a look at the cash flows (as reported by the current owner):
Expenses per unit: $2,000
Expense to GOI: 28%
Cap rate: 10.3%
Cash on Cash: 29.5%
Asking price: $800,000
Conventional financing, 20% down preferred.
Thank you in advance for any advice you are able to provide.
For clarification, are they all POHs?
@Casey Smith Welcome to BP and congrats on the potential deal.
Here are the issues I see:
1. The seller includes income from the rentals into the value of the park. Most investors only count the income from lot rent into valuing the park and treat the homes like a separate transaction. If you only count Gross rents from the lot rent (@ $255/month) the Gross rents drop to $63k/yr. If you want to keep running it like an apartment building, by all means ignore what I'm saying, but you'll get a more accurate price if you think about buying a park then buying the trailers instead of buying them together, since you can get appraisals on the trailers quite easily.
2. For a small park like this they have very very low expenses, considering they have 20 rentals.
3. There is some upside to sub metering utilities.
4. There number don't included vacancy credits.
$74k/pad is a steep price for a park in rural WA State with mainly POHs.
What are the age an conditions of the homes?
@Jon Dorsey Personally Owned Homes, right? Answer: no. It is being advertised as a sale of both the land and units together. As @Bill F. puts it, like an apartment building.
Bill, thank you for your response. You made some great points. By vacancy credits, do you mean budgeting for future vacancy? If so, I don't think those numbers were included because this park has not experienced an material vacancy in years.
As for the age and condition, the only date listed in the detail is that of the duplex which was built in 1971. It is my understanding that the units are not in great condition. Here is what I do know: low-income area, tenants have generally been in the units for a long time, and the fact that at the end of the day they are mobile homes of which quality is not a high priority.
Can you help me understand how you got to $74k per unit?
@Casey Smith No worries man, that's what BP is about.
POH (Park Owned Homes) and TOH (Tenant Owned Homes) are industry parlance. So this park is all POHs
-Yes, that is what I mean by vacancy credit. I can see where you are coming from about the park not having had any vacancy, so not accounting for it, but that is the way the seller ran the park, not the way you run the park. Such a wide range of rental rates tells me that the seller is charging well below market rents, which artificially drives down vacancy. If you charge close to market rent you will have vacancy.
-I disagree 100% with the assertion that quality is not a priority. 1. The tenants are your customers in this model and you are trying to sell them a product. 2. The condition of the homes determines the value of the park. Notice I didn't say age, I said condition. Parks with well kept homes command higher prices. 3. If you've ever sold a car and looked in the Kelly Blue Book or NADA guide you'll remember the cars a priced off of "fair, good, very good, excellent". The same applies to MHs. Condition is integral to valuation, particularly when you have lots of POH.
- price/pad is a rough "rule of thumb" that you can do on the back of a napkin (or lets be honest, your cell phone) My bad, it was $40k/pad, I had plugged you park into another model I had and didn't change all the data.
Total Price of the Park = $800k ~$40k/pad
Number of Pads 20
$40k/ pad is better, but not by a lot since you said this was a rural park, its small, and has lots of POH.
@Bill F. First off, I cannot thank you enough for your insights.
As far as the range in rents is concerned, I also found the gap to be a bit concerning. Also since the HUD units are at the highest end of the range, that caught my eye. Do you have any experience dealing with these? Can the owner adjust those rents? Should they be a benchmark for how the other rents should be determined? Either higher or lower from there?
On quality: I should have been more clear. I should have expanded to say that it doesn't seem like maintaining high quality units has been a priority of the current ownership.
Here is a very loaded question that I will totally understand if you pass on answering. In the scenario I was able to get this property, improve quality, raise rents to something closer to market, and deal with the vacancy (to whatever extent) that ensues, how would you handle the PR of being the new owner who is seen as "pricing out poor people"? Is this just something I've got to learn to live with being in this business? Since it is, after all, a business?
$40k is what I got too, so thanks for clearing that up.
When you say HUD homes to you mean Renters receiving government assistance? Like Section 8 Housing.
As for your last question, I'd concern myself more with the steps that would get you to that point first. Taking all of that into account, as long as you behave in an ethical manner, treat all your residents fairly, and provide clean, safe, and affordable housing, you shouldn't have a lot of issues.
Is there any opportunity for value add?
@Jeff Ostreim Can you expand on this a bit? It could definitely use some rehab if that's what you mean. Both the units themselves and the grounds are not in the greatest condition.